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TALKS 


ON 


Banking  and  Elementary  Economics 


\v.\\ 


1922-1923  ^/ 


<S     nov^-^ 


To  be  delivered  by  the  banker  before  the 
higher  grades  of  grammar  schools,  high 
schools,  colleges  and  universities,  as  well 
as  before  Parents'  Associations,  Teachers' 
Institutes,  Farmers'  Institutes,  Chambers 
of  Commerce,  Boards  of  Trade,  Men's  and 
Women's  Clubs,  Rotary  Clubs,  Kiwanis 
Clubs,  Lions  Clubs,  Civitas  Clubs,  and 
so  forth. 


Prepared  by  the 

Cammittee  on  Public  Education 
American  Bankers  Association 
Five  Nassau  Street,  New  York 


CONTENTS 


TALK  SUBJECT                                                                    DATE  OF  DELIVERY 

No.  1    —The  General  Idea  of  the  Bank September  25,  1922. 

No.  2    —The  Bank  Check October  25,  1922. 

No.  3    — Loaning  the  Bank's  Money November   25,  1922. 

No.  4    — Character — The   Basis   of   Bank   Credit December   25,  1922. 

No.  5    — Why  a  Corporate  Trustee.'^ January   25,  1923. 

No.  6    — The  Bank  and  Your  Investments February    25,  1923. 

♦No.  7A: — Our  Relations  and  the  Bank's  Relations  With  the 

Rest  of  the  World March  25,  1923. 

*No.  7B — The   Relationship   of  Farmer   and   Banker March  25,  1923. 

No.  8    — Relation    of    the    Bank    to    the    Federal    Reserve 

System    April   25,  1923. 

No.  9    — Analysis  of  a  Simple  Bank  Statement May  25,  1923. 

♦Alternate. 

(7 A  suggested  for  city  schools) 

(7B  suggested  for  country  schools) 


BG 


t.'^ 

A5?. 


NOTES    FOR    BANKERS 


THE  Committee  on  Public  Education  of  the  American  Bankers  Association,  in  its  en- 
deavor to  aid  in  the  greater  prosperity  of  the  people  of  America,  has  planned  a  series 
of  simple  Talks  on  Banking  and  Elementary  Economics  to  be  delivered  by  the  banker 
to  the  students  in  the  higher  grades  of  the  grammar  school,  the  high  school,  the  college,  and  the 
university. 

The  Talks  have  been  so  designed,  each  lecture  being  preceded  by  an  outline,  that  the 
speaker  may  use  liberally  from  his  experience  in  fitting  the  Talk  to  the  group  which  he  may 
be  addressing.  Many  requests  for  speakers  have  come  from  Parents'  Associations,  Teachers' 
Institutes,  Farmers'  Institutes,  Chambers  of  Commerce,  Boards  of  Trade,  Men's  and  Women's 
Clubs,  Rotary,  Lions,  and  Civitas  Clubs,  and  so  forth.  The  banker  should  regard  it  a  duty 
to  the  welfare  of  his  country  to  respond  to  such  invitations  with  an  address  which  will  make 
better  understood  the  important  sphere  of  his  activity. 

In  many  states,  the  Secretaries  of  the  State  Bankers  Associations  have  organized 
Speakers'  Bureaus,  where  are  recorded  the  names  of  those  bankers  who  have  especially  qualified 
on  some  particular  phase  of  banking,  and  may  be  called  upon  to  meet  engagements  upon  con- 
vention programs,  and  the  like.  At  the  moment,  a  better  public  understanding  of  the  need  and 
possibilities  of  the  Federal  Reserve  System  is  important.  Bankers  should  take  every  oppor- 
tunity to  inform  the  public  more  thoroughly  as  to  how  much  our  commercial  prosperity  and 
progress  is  dependent  on  such  a  system. 

It  is  conceded  that  the  banker  has  much  to  learn  from  the  teacher  in  regard  to  the 
method  of  presentation,  for  which  reason  the  closest  cooperation  between  banker  and  teacher 
is  urged.  Outlines  of  all  the  lectures  have  been  prepared  for  the  use  of  the  teacher.  If  they 
have  not  been  furnished  to  the  teachers  before  whose  classes  these  talks  are  being  given,  they 
may  be  had  by  applying  to  the  Secretary  of  the  Committee  on  Public  Education  of  the 
American  Bankers  Association,  Five  Nassau  Street,  New  York  City.  It  is  respectfully  sug- 
gested that  the  banker  familiarize  himself  with  the  Talk  to  be  delivered,  so  that  he  may  give 
it  extemporaneously  and  use  local  business  activities  as  illustrations. 

The  bankers  whose  talks  were  of  greatest  benefit  last  year  were  those  who,  after  each 
third  or  fourth  talk  invited  the  teachers  and  the  pupils  of  the  classes  to  visit  the  banks  to 
visualize  what  had  been  discussed;  who  there  took  pains  to  make  the  visitors  feel  that  they 
were  truly  welcome  and  that  a  bank  is,  in  a  large  measure,  a  public  institution,  created  for  the 
best  possible  community  advancement,  and  an  institution  which  desires  above  all  things  to  serve. 

While  bankers,  not  accustomed  to  public  speaking,  may  approach  this  new  duty  with  some 
hesitation,  they  will  soon  find  in  it  a  charm  that  will  make  them  want  to  continue  a  work 
which  must  ultimately  prove  of  inestimable  value  to  the  banker's  community,  and  to  the  country 
at  large,  to  say  nothing  of  the  banking  business  itself  to  which  many  benefits  will  accrue  from 
a    greater   general    prosperity. 

Immediately  upon  receipt  of  these  Talks,  the  banker  should  get  in  touch  with  the  school 
authorities  nearest  his  bank,  and  arrange  for  the  DATE  and  HOUR  when  he  is  to  appear  at 
the  school. 

The  local  banker  should  endeavor  to  arrange  with  his  newspaper  for  the  publication  of 
these  Talks  as  soon  as  possible  after  the  date  set  for  their  release. 

The  Committee  on  Public  Education  bespeaks  for  this  work  the  earnest  and  thoughtful 
cooperation  of  the  bankers  of  America. 


Chairman, 
Committee  on  Public  Education. 


^ 


Outline  for  Talk  No.  1 
THE  GENERAL  IDEA  OF  THE  BANK 

L  Definition  of  a  Bank 

A.  A  bank  is  an  institution  engaged  in  the  business  of 

1.  Receiving  deposits 

2.  Making  loans 

3.  Transferring  money  and  credit 

n.  EKstorical  Comment 

A.  The  bank  may  be  compared  with  the  Greek  temple  where  the  money  dbanger 
used  to  sit  upon  a  bench — ^Latin,  Bancus ;  Italian,  Banco ;  German,  Bank ; 
English,   Bank. 

B.  Reference  also  may  be  made  to  the  beginnings  of  the  savings  bank  movement, 
which  grew  out  v  of  small  savings  societies  created  in  England  and  on  the  con- 
tinent of  Europe,  one  of  the  first  of  which  was  started  by  Daniel  Defoe,  author 
of   "Robinson   Crusoe." 

ni.  Organization 

A.  Selling  stock 

B.  Stockholders 

C.  Building 

rV.  Operation 

A.  Liabilities 

1.  Capital  stock 

2.  Deposits 

B.  Assets 

1.  Bank  building 

2.  Furniture,    fixtures,   equipment 

3.  Cash  on  hand 

4.  Reserve 

5.  Loans  and  investments 

V.  Usefulness  to  * 

A.  Community 

1.  Cultivates  habits  of  saving 

2.  Handles  savings 

3.  Is   medium   of   all   financial   transactions 

4.  Is  available  for  loans   to  promote  successful  business 

5.  Servos   for  the  safekeeping  of  money  and  valuables 

B.  Nation 

1.  Develops  community  life  and  industry 

2.  Promotes   success  and   progress 

3.  Enlarges   commercial   field   for   its  locality 

Copyright,  1922,  American  Bankers  AssociatJoa 


Talk  No.  1 
Public   School  Series 


THE    GENERAL    IDEA    OF    THE    BANK 

ISSUED  BY 

Committee  on  Public  Education 
American    Bankers   Association 


The  word  "Bank,"  wherever  used,  refers  alike  to  trust 
companies,  state  banks  and  national  banks — in  short,  to 
all  banking  institutions  having  a  commercial   department. 


THE  purpose  of  1113'  talk  today  is  to  give  you  certain  interesting  facts  about  banks.  If 
you  were  asked  to  express  your  ideas  about  banks,  each  of  you  would  doubtless  have 
a  different  answer.  Perhaps  you  could  tell  only  of  some  special  way  in  which  you 
have  known  a  particular  bank  used  either  by  yourself  or  by  some  member  of  your  family. 
The  bank,  however,  plays  such  an  essential  part  in  the  life  of  every  community  that  every 
one  ought  to  have  a  clear  conception  of  what  it  is,  and  why  it  goes  hand  in  hand  with 
human  progress. 

Today  we  shall  not  consider  any  of  the  special  methods  of  banking.  Our  purpose  is 
to  see  how  the  bank  affects  the  business  life  and  welfare  of  all  the  people  of  our  community. 

Starting  a  Bank 

One  of  our  large  city  bankers,  whose  boyhood  had  been  spent  in  a  small  toA\Ti,  was  re- 
cently telling  some  friends  about  his  early  ideas  concerning  banks.  When  he  was  eleven 
years  of  age,  the  first  bank  in  his  home  town  was  started,  his  father  being  one  of  the  mem- 
bers of  the  board  of  directors.  He  watched  the  small  banking  house  take  shape,  saw  the 
thick  walls  of  the  vault  erected  inside  of  the  building,  and  observed  the  workers  with  the 
greatest  wonder,  as  they  set  into  place  the  heavy  vault  door  and  heavier  safe.  To  his  youth- 
ful mind,  the  town  bank  was  merely  a  larger  model  of  the  small  dime  bank  he  kept  at  home. 
He  believed  that  the  larger  bank  was  just  a  good,  safe  strong-box  in  which  people  could 
deposit  their  money.  This  idea  seemed  correct  when,  after  a  few  months,  the  bank  opened 
for  business.  Each  day  the  boy  saw  people  leave  their  money  in  care  of  the  bank,  the  duty 
of  which  he  supposed  to  be  the  protection  of  the  money  until  it  was  again  needed,  when 
the  depositors  could  draw  it  out. 

Very  soon  certain  things  began  to  puzzle  this  small  boy,  for  he  knew  that  the  officers 
and  clerks  of  the  bank  were  drawing  salaries.  One  day  he  asked  his  father  some  of  the  ques- 
tions about  the  bank  which  had  come  to  his  mind.  The  boy's  first  question  was :  "Father, 
if  a  man  takes  a  hundred  dollars  to  the  bank  today,  can  he  go  to  the  bank  tomorrow,  and 
draw  it  all  out  again.?"  "Every  cent  of  it,"  said  the  father.  "Then,"  said  the  lad,  "I 
want  to  know  how  a  bank  can  make  any  money  for  itself,  and  pay  salaries  and  other  ex- 

Copyrlght,  1922,  American  Bankers  Association 


penses."  This  started  a  new  line  of  thought  in  the  father's  mind.  Here  was  a  boy  who 
wanted  to  understand  something  of  the  bank  and  its  place  in  the  affairs  of  the  town.  So  the 
father  carefully  began  his  explanation. 

Why  Banks  Are  Needed 

"When  our  bank  was  first  talked  about,  the  gentleman  chosen  as  president,  because  he 
was  one  of  our  leading  business  men,  came  to  me  and  asked  if  I  would  help  to  organize  the 
bank  and  buy  some  shares  of  stock  at  one  hundred  dollars  each,  the  full  subscription  to 
amount  to  fifty  thousand  dollars.  I  told  him  I  had  hoped  for  a  long  time  that  a  bank  would 
be  organized  in  our  town.  For  years,  the  men  who  were  operating  the  iron  mills  had  to  send 
to  a  neighboring  city  for  money  to  pay  their  employes.  Our  merchants  had  always  had  diffi- 
culty in  taking  care  of  the  money  received  in  their  business,  and  there  had  been  no  place  to 
care  for  the  people's  savings.  Since  the  right  men  were  heading  the  movement  for  the 
new  bank,  I  was  glad  to  buy  some  of  the  shares.  In  a  short  time,  the  president  told  me 
that  the  full  fifty  thousand  dollars  had  been  paid  by  different  people  of  the  town.  This 
money  made  up  what  is  called  the  Capital  Stock  (Illustrate).  The  Capital  Stock,  in  addi- 
tion to  furnishing  money  with  which  to  start  a  bank,  also  serves  as  a  protection  to  all 
those  who  place  their  money  on  deposit."  (Every  bank  chartered  under  the  law  must  have 
Capital  Stock,  the  amount  depending  upon  the  size  of  the  community  and  the  kind  of 
business  to  be  conducted.) 


How  Banks  Operate 

"Accordingly,"  said  the  father,  "when  the  bank  opened  for  business,  its  Capital  Stock 
was  fifty  thousand  dollars.  Soon  Deposits  came  in  from  merchants,  manufacturing  plants, 
farmers,  churches,  lodges,  and  other  organizations,  borough  and  township  treasurers,  wage 
earners,  and  women  and  children,  until  at  the  end  of  the  first  month  about  one  hundred  thou- 
sand dollars  (Illustrate)  had  been  deposited.  The  bank  then  had  fifty  thousand  dollars 
which  it  owed  to  its  stockholders  and  one  hundred  thousand  dollars  which  belonged  to  its 
depositors,  or  a  total  of  one  hundred  an  1  fifty  thousand  dollars.  The  Capital  Stock  and  the 
Deposits  are  referred  to  as  Liabilities  of  a  bank.     Now  listen  closely,"  said  the  father. 

"While  it  is  true  that  the  depositors  could  go  to  the  bank  the  very  next  day  and  draw 
out  all  they  had  previously  put  in,  experience  has  shown  that  this  is  never  done  by  all  de- 
positors at  the  same  time.  Therefore,  the  bank  does  not  need  to  keep  on  hand  all  the  money 
that  is  brought  in,  but  only  enough  to  pay  those  who  may  wish  to  draw  out  part,  or  all,  of 
their  deposits.  Since  every  depositor  tries  to  keep  a  fair-sized  balance  in  the  bank,  there  is 
always  more  money  on  hand  than  is  needed  to  pay  those  who  are  drawing  against  their 
Deposits.  The  law  requires  that  the  bank  keep  a  certain  percentage  of  the  Deposits  in  its 
vaults  in  actual  cash.  This  cash  is  called  the  bank's  Reserve  (Illustrate).  At  the  end  of 
the  first  month,  let  us  say,  the  bank  had  in  its  safe,  as  Reserve,  about  twenty  thousand 
dollars.  There  should  always  be  enough  cash  held. by  the  bank  to  take  care  of  the  normal 
amounts   of  money   needed  by   its   customers." 

How  Banks  Earn  Money 

"Now,"  the  father  continued,  "the  question  is  this :  What  does  the  bank  do  with  its 
Capital  Stock  and  with  the  balance  of  Deposits  in  excess  of  the  cash  held  as  its  Reserve? 


Presently  you  will  see  how,  if  the  management  is  experienced  and  careful,  the  bank  is  able  to 
pay  salaries  and,  in  addition,  to  earn  some  money.  Part  of  the  money  that  came  from  the 
sale  of  shares  of  Capital  Stock,  of  course,  had  to  be  spent  for  the  bank  building  and  its  equip- 
ment— vault,  safe,  furniture,  adding-machine,  typewriter,  ledger,  stationery,  and  supplies — aU 
of  which  cost  (in  those  days)  about  twenty  thousand  dollars  (Illustrate).  The  balance  of  the 
Capital  Stock,  which  would  be  thirty  thousand  dollars,  together  with  the  balance  of  the  De- 
posits in  excess  of  the  Reserve  at  the  end  of  the  first  month,  which  would  be  eighty  thousand 
dollars,  or  one  hundred  and  ten  thousand  dollars  in  all,  was  either  invested  or  loaned  out  at 
interest  to  business  people  of  good  standing,  who  promised  to  repay  the  money  to  the  bank  in 
thirty,  sixty,  or  ninety  days.  The  interest  on  these  loans  and  investments  provides  the  Earn- 
ings of  the  bank,  out  of  which  salaries  and  other  expenses  are  paid.  This  practice  of  loaning 
money  is  called  discounting,  or  giving  credit,  and  when  fully  understood,  credit  is  what  the 
bank  deals  in.  Just  as  the  merchant  buys  and  sells  goods,  so  the  banker  buys  and  sells  money 
and  credit. 

"The  Assets  of  a  bank,  just  as  in  the  case  of  a  store  or  other  business,  are  the  property 
owned  by  the  bank.  They  are  Cash  on  hand,  Promissory  Notes  representing  the  money  loaned 
out  at  interest  to  borrowers,  the  Bank  Building,  and  so  forth.  In  like  manner,  the  Liabilities 
are  what  the  bank  owes  to  others,  to  the  stockholders,  to  depositors,  and  so  forth. 

**A8  the  town  grows  and  the  business  of  the  community  expands,  the  Deposits  of  the  bank 
become  larger.  Other  banks  may  organize,  until,  as  in  th^  case  of  cities,  banks  spring  up  in 
many  localities  in  order  to  handle  the  necessary  money  and  credit  transactions.  No  matter 
how  large  our  great  city  banks  become,  they  are  all  organized  and  conducted  upon  the  same 
principle  and  for  the  same  purpose  as  the  bank  in  the  small  town." 

This  explanation  by  the  father  to  his  son  sets  forth  the  relation  of  the  bank  to  all  the 
people  of  the  community,  and  I  hope  that  it  has  given  you  some  new  and  clearer  ideas  about 
banks.  At  another  time,  I  may  speak  to  you  concerning  a  few  of  the  special  methods  used  in 
the  banking  business. 

Use  of  the  Bank  Helps  Everybody 

One  thought,  however,  I  want  to  leave  with  you  today.  Scarcely  anywhere  is  there  a 
financial  transaction  in  which  the  bank  does  not  have  a  direct  or  an  indirect  part,  either 
through  the  stockholders,  the  management,  or  the  depositors.  Every  successful  business  person 
makes  use  of  the  bank  for  borrowing  money,  for  the  safekeeping  of  money  and  valuables,  and 
in  other  ways.  The  wonderful  strides  our  country  has  made  in  the  field  of  commerce  can  be 
accounted  for  largely  by  the  manner  in  which  the  banks  have  been  made  use  of  by  the  people 
of  just  such  communities  as  ours.  It  is  important  for  you  to  see  that  as  each  American  boy 
or  girl,  man  or  woman,  cultivates  the  habit  of  saving,  and  handles  savings  and  all  other 
financial  transactions  through  the  bank,  he  is  being  a  real  help  to  his  community.  Why?  Be- 
cause the  bank  is  the  reservoir  into  which  flow  the  savings  of  the  people  of  the  community,  to 
be  used  by  the  banker  in  helping  to  develop  the  industry  and  life  of  the  community.  The  bank 
helps  the  people  to  succeed,  and  the  community  to  progress.  Acquire  habits  that  lead  to  suc- 
cess. Use  your  bank  and  give  the  savings  habit  and  the  banking  habit  places  of  real  prom- 
inence in  your  life. 

< 

NOTE:  This  Talk  is  to  be  delivered 
on  or  before  September  25,  1922  (or  as 
soon  thereafter  as  possible),  after  which 
it  may  be  released  for  publication. 


SUGGESTIONS 


Talk  No.  1 

1.     Each  item  referred  to  in  the  talk  should  be  placed  on  the  blackboard  as  the  talk  proceeds, 
so  that,  at  the  close,  a  balance  sheet  is  shown  as  follows : 

THE   HOMETOWN    BANK 

Assets  Liabilities 

Loans  and  Investments.  .  .$110,000.00  Capital  Stock $  50,000.00 

Bank  Building 15,000.00  Deposits 100,000.00 

Furniture  and  Fixtures .  .  .        5,000.00 
Cash  Reserve 20,000.00 


$150,000.00  $150,000.00 


2.  Questions  on  the  subject  matter  presented  may  be  invited  from  pupils  after  the  talk  is  fin- 

ished, but  care  should  be  used  to  keep  the  questions  confined  to  the  subjects  treated  in 
the  talk. 

3.  After  the  balance  sheet  is  completed  and  either  before  or  after  any  questions  from  the  pu- 

pils, it  would  be  well  to  review  the  various  items  on  the  balance  sheet  with  brief  ex- 
planations. 

4.  Each  talk  should  always   be  accompanied  with  a  suggestion   that   the   pupils   tell   their 

parents  about  it. 

5.  With  each  talk  the  speaker  should  point  out  that  the  word  "Bank,"  wherever  used,  refers 

alike  to  trust  companies,  state  banks,  and  national  banks — in  short,  to  all  banking  in- 
stitutions having  a  commercial  department. 

6.  The  time  occupied  for  each  talk  should  not  exceed  twenty  minutes  at  the  outside. 

QUESTIONS  TO  BE  LEFT  WITH  THE  TEACHER 

1.  Why  are  banks  needed.'' 

2.  What  is  the  name  of  the  fund  established  when  the  bank  is  first 

organized? 

3.  What  sort  of  men  are  usually  chosen  as  bank  directors  ? 

4.  How  does  the  bank  earn  money.'* 

5.  What  is  the  name  of  the  fund  held  by  the  bank  to  pay  depositors 

who  wish  to  draw  out  money  from  day  to  day.? 

6.  What  name  is  used  to  describe  the  funds  owed  by  the  bank  to 

stockholders  and  depositors.? 

7.  What  name  is  used  to  describe  the  notes,  cash  and  other  property 

owned  by  the  bank? 

8.  Who  should  use  the  bank? 


Outline  for  Talk  No.  2 
THE    BANK    CHECK 

I.  Bank  Deals  in  Two  Kinds  of  Deposits 

A.  Time — savings   deposits 

1.  Not  subject  to  check 

B.  Demand — commercial  deposits 

1.   Subject  to  check 

n.  Historical  Comment 

A-  Bank  deposits  may  be  compared  with  deposits  of  ore,  coal,  and  so  forth,  in 
nature.  Consider  the  gold,  money,  and  jewels  deposited  in  the  raults  of  the 
goldsmiths,  for  safekeeping.  Sealed  in  bags,  and  returned  as  put  in.  Today, 
deposits  change  in  character.  Identical  pieces  of  money  not  returned.  Credit 
given.  Depositor  paid  fee  to  goldsmiths  for  service.  Today  bank  pays  depositor 
interest  for  use  of  money. 

III.   Commercial  Account 

A.  Signature  card 

B.  Deposit  shp 

C.  Pass  book — record  of  deposits 

D.  Check — means  of  withdrawal 

1.  Definition 

a.  A  check  is  a  written  order  addressed  to  a  bank,  to  pay,  to  a  person 
named  therein,  an  indicated  amount  from  the  money  at  the  credit  of 
the  drawer. 

2.  Commercial   instrument 

a.  Only  about  7%  to  7^2^  o^  *^  business  transactions  conducted  with 
actual  money.  92%  to  92^2%  conducted  with  conunercial  instruments; 
one   of   the  most   important  is  check. 

8.   Endorsements.     Checks  should  be  endorsed  as  drawn  on  face. 

a.  Blank,   or   bearer,   simply   writing  name. 

b.  Limited  or   full.      "Pay   to  the  order  of." 

c.  Restricted.  Payment  to  be  made  to  one  specific  person.  *  "Pay  to 
only." 

4.  Benefits  of  checking  account 

a.  Record   of   all   items   of   income  and  expenditure 

b.  Cancelled   checks   are   receipts 

c.  Good  business  methods    and  standing 

d.  Safety  of  money 

e.  Helps  bank's  abiUty   to  loan  money  in  developing  community. 

Copyright,  1922,  American  Bani^ers  Association 


\l). 


Talk  No.  2 

Public   School   Series 


THE     BANK     CHECK 

ISSUED  BY 

Committee  on  Public   Education 
American     Bankers    Association 


The  word  "Bank,"  wherever  used,  refers  alike  to  trust 
companies,  state  banks  and  national  banks — in  short,  to 
all   banking   institutions   having   a  commercial   department. 


OUR  Talk  on  the  "General  Idea  of  the  Bank"  taught  us  that  banks  acquire  their 
capital  from  the  sale  of  shares  of  stock  to  the  people  of  the  community,  and  thus 
provide  themselves  with  the  necessary  funds  and  equipment  to  conduct  business. 
Today  we  shall  discuss  the  "Bank  Check,"  and  consider  some  of  the  reasons  for  its  great 
importance  and  wide  use. 

Savings  Not  Subject  to  Check 

In  the  first  place,  let  us  distinguish  between  the  two  kinds  of  deposits  in  which  a 
bank  deals:  Time  Deposits  and  Demand  Deposits.  Time  Deposits  is  the  name  given  to 
deposits  made  in  Savings  Accounts ;  Demand  Deposits  is  the  name  given  to  deposits  made 
in  Commercial — that  is.  Checking — Accounts.  Many  of  you  have  Savings  Accounts.  The 
check  is  not  used  in  withdrawing  money  from  a  savings  account.  In  the  rules  printed  in 
your  savings  pass  book,  you  have  noticed  a  definite  statement  that  savings  are  "not  sub- 
ject to  check."  Whenever  you  wish  to  withdraw  money  from  your  savings  account,  you 
must  go  to  the  bank  in  person,  where  you  write  out  a  receipt  and  present  it  to  the  bank, 
so  that  the  money  can  be  paid  directly  to  you  and  so  that  the  amount  of  the  withdrawal 
may  be  entered  at  once  in  your  pass  book.  Since  people  do  not  frequently  withdraw  money 
from  their  savings  accounts,  to  appear  in  person  causes  little  or  no  trouble  to  anyone. 
Where  money  must  be  continually  withdrawn  for  the  payment  of  bills,  a  more  convenient 
method  is  necessary.  Hence  it  is  that  the  bank  check  is  used  extensively  in  everyday 
business  transactions,  and  has  become  a  very  important  commercial  instrument.  Only  about 
7%  to  714%  of  all  our  business  transactions  is  conducted  with  money.  Approximately 
92%  to  92^%  is  conducted  with  commercial  instruments.  One  of  the  most  important 
is  the  check. 

In  order  to  make  this  clear  to  you,  we  shall  consider  the  bank  transactions  of 
Mr.  Smith,  the  storekeeper,  who  has  just  started  in  business.  In  a  general  way  his  deal- 
ings with  the  bank  are  like  those  of  all  other  business  people. 

Need  for  the  Bank  Check 

Storekeeper  Smith's  customers  pay  him  both  in  cash  and  by  checks  for  the  goods  he 
sells  to  them.  At  the  end  of  the  first  day  he  counts  up  the  proceeds  of  the  day's  business 
and  finds  his  sales  have  amounted  to  $500.  What  use  does  he  make  of  this  money  .f*  He 
owes  most  of  it  to  business  concerns  from  which  he  purchased  the  goods  which  he  is  selling. 

Copyright,  1922,  American  Bankers  Association 


Some  of  these  companies  are  in  Mr.  Smith's  town,  and  others  are  located  at  some  distance 
from  it.  Mr.  Smith  could  send  them  cash  by  mail,  but  this  method  of  payment  would  be 
unwise  because  of  the  danger  of  the  money  being  lost  in  transit.  Again,  he  might  buy 
an  express  or  postal  money  order  for  the  amount  due,  but  to  do  this  regularly  would 
require  a  great  deal  of  his  time,  and  would  involve  needless  expense.  Besides,  while  a 
money  order  is  in  reality  a  check  drawn  by  the  express  company  or  by  the  post  office,  in 
favor  of  some  person  or  firm,  the  money  order  is  not  returned  to  Mr.  Smith  after  it  has  been 
cashed  and  cancelled,  but  to  the  express  company  or  to  the  post  office  that  issued  it.  On 
the  other  hand,  a  cancelled  check  would  be  returned  to  Mr.  Smith,  who  could  keep  it  as  a 
receipt — as  proof  that  the  bill  for  the  goods  had  been  paid.  More  than  this,  in  order  to 
keep  accurate  records,  Mr.  Smith  wants  to  have  one  account  in  which  all  of  his  receipts 
can  be  entered  and  out  of  which  all  payments  can  be  made.  He  therefore  adopts  the 
course  that  most  other  business  men  and  women  follow.  He  takes  his  $500  to  the  bank, 
where  it  is  safely  kept  and  can  be  drawn  upon  as  needed. 

Opening  a  Checking  Account 

When  Mr.  Smith  arrives  at  the  bank,  he  tells  an  officer  that  he  wishes  to  open  a 
checking  account.  Many  banks,  especially  in  the  larger  centers,  require  the  new  depositor 
to  be  introduced  by  a  person  known  to  the  bank.  A  card  is  handed  to  Mr.  Smith  on 
which  he  is  asked  to  sign  his  name  exactly  as  he  desires  the  account  to  be  carried  on  the 
records  of  the  bank,  as,  for  example,  "J.  L.  Smith"  or  "John  L.  Smith."  This  signature 
must  be  the  same  on  all  checks  in  6rder  to  identify  them  as  genuine.  A  deposit  ticket 
is  then  filled  out  (Illustrate)  bearing  his  name  exactly  as  written  on  the  signature  card, 
and  listing  the  currency  (paper  money),  gold,  silver,  and  each  check  separately.  The 
total  is  $500.  The  teller  then  enters  this  amount  in  a  small  pass  book  (Illustrate),  which 
is  a  record  of  the  amounts  deposited.  The  pass  book  is  issued  in  Mr.  Smith's  name,  and 
is  handed  to  him,  together  with  a  supply  of  blank  checks,  which  are  the  means  used  to 
withdraw  money  from  a  checking  account.  Mr.  Smith  is  now  ready  to  pay  his  bills  by 
check  up  to  a  total  of  $500.  This  is  all  that  is  required  in  opening  a  checking  account, 
regardless  of  the  size  of  the  deposit. 

Paying  Bills  by  Check 

Upon  returning  to  his  store,  Mr.  Smith  refers  to  his  file  of  bills — bills  for  his  stock  of 
canned  goods,  sugar,  dried  fruits,  and  other  groceries.  The  first  is  for  $20,  covering  a 
barrel  of  sugar  from  Jones  &  Company,  wholesale  merchants  in  a  neighboring  city.  He 
turns  to  his  check  book  (Illustrate  with  check  having  stub  attached)  on  the  stub  of  which 
he  has  written  his  bank  balance  of  $500.  He  fills  out  the  check  stub  first,  by  writing  the 
date,  the  name  of  Jones  &  Company,  the  nature  of  the  payment,  namely,  "barrel  of  sugar," 
and  the  amount  $20,  and  deducts  this  amount  from  his  account.  His  balance  is  now  $4*80. 
He  fills  out  the  check  (Illustrate)  in  the  same  way,  signs  it  on  the  lower  line,  just  as  he 
signed  his  name  on  the  signature  card  and  mails  it,  together  with  the  bill,  to  Jones  & 
Company. 

In  order  to  cash  or  deposit  the  amount  of  this  check,  Jones  &  Company  must  either 
write  or  stamp  their  endorsement  on  the  back  (Illustrate  Blank  and  Full  Endorsements). 
The  check  will  be  received  at  any  bank  where  the  endorsement  is  known  to  be  genuine.  The 
bank  receiving  the  check  will  either  pay  or  credit  Jones  &  Company,  and  send  the  check 
to  the  bank  in  which  Mr.  Smith  deposits  his  money,  where  the  amount  will  be  deducted  from 
Mr.  Smith's  $500  balance  and  the  check,  after  being  properly  cancelled,  will  be  returned  to 
him    at   the   end   of   the   month.      He   will   then    have    a    complete    record    showing    that    he 


deposited  $500,  that  he  drew  a  check  payable  to  Jones  &  Company  for  $20,  that  he  has  a 
balance  left  of  $480,  and  that  the  biU  in  question  has  been  duly  paid,  since  he  has  the  can- 
celled check  with  Jones  &  Company's  endorsement  upon  it  as  evidence  of  payment. 

The  bank  will  pay  all  checks  presented  to  it  bearing  Mr.  Smith's  signature  as  given  on 
his  signature  card  in  any  sums  up  to  the  amount  of  his  bank  balance,  which  he  continually 
increases  by  deposits  and  decreases  by  checks  drawn  against  his  account.  This  process  of 
making  deposits  and  issuing  checks  continues  day  after  day,  both  the  depositor  and  the 
bank  keeping  their  own  records. 

When  you  are  told  that  millions  of  such  transactions  are  handled  every  day  by  the 
banks  and  trust  companies  of  the  United  States ;  that  in  one  year  more  than  two  hundred 
and  fifty  billions  of  dollars  in  checks  have  passed  through  the  New  York  Clearing  House 
alone;  and  that  payments  of  such  vast  sums  have  been  made  without  the  use  of  any  actual 
money,  you  begin  to  see  what  a  wonderful  system  has  been  built  up  by  the  use  of  the  small 
slip  of  paper  we  call  the  bank  check,  and  how  essential  the  check  is  to  the  business  and 
commercial  life  of  the  present  day. 

Benefits  of  a  Checking  Account 

But  while  the  large  figures  lead  us  to  think  of  the  bank  check  as  related  chiefly  to 
large  business  dealings,  let  us  remember  that  the  person  having  financial  transactions  few  in 
number  and  small  in  amount  will  find  the  checking  account  just  as  valuable  as  the  active 
business  man  or  firm.  All  banks  are  glad  to  have  checking  accounts  of  people  of  moderate 
incomes,  for  the  reason  that  the  small  depositor  of  the  present  is  very  likely  to  become  the 
more  substantial  depositor  of  the  future.  A  checking  account  offers  a  number  of  advan- 
tages,  some  of  which   are  as   follows : 

1.  It  gives  each  depositor  a  record  of  all  items  of  income  and  expenditure,  and 
the  cancelled  checks  will  always  show  where  his  money  went, 

2.  Every  check  issued  serves  as  a  receipt  for  a  certain  sum  of  money  to  a  certain 
person  or  persons,  and  in  case  of  a  dispute  is  accepted  as  evidence  of  payment. 

3.  The  depositor,  by  following  this  systematic  method  in  handling  his  money,  comes 
to  be  recognized  as  a  person  of  business  ability.  Good  business  standing  is 
always  desirable. 

4.  Money  kept  on  deposit  in  the  bank  is  far  less  likely  to  be  spent  or  lost  than 
if  carried  in  the  pocket  or  kept  at  home  in  the  bureau  drawer. 

6.  Each  dollar  deposited  in  a  bank  helps  the  general  financial  welfare  by 
increasing  the  amount  that  the  bank  can  Ipan.  It  is  largely  through  loans 
made  by  the  banks  to  the  people  of  the  community  that  business  needs  are 
met   and  commercial  progress   facilitated. 

One  of  the  purposes  of  this  Talk  has  been  to  help  you  understand  how  easy  it  is  to 
start  a  checking  account,  and  how  convenient  it  becomes  for  every  family  to  handle  house- 
hold expenditures  in  this  way.  Every  banker  can  tell  of  well-to-do  families  whose  checking 
accounts  began  with  very  small  deposits  and  whose  financial  progress  is  largely  due  to  their 
use  of  right  methods.  Proper  use  of  a  checking  account  has  helped  to  shape  the  career 
of  many  a  successful  business  man.  Therefore,  as  soon  as  you  have  a  regular  income, 
cultivate  the  habit  of  using  a  checking  account,  whether  your  transactions  be  small  or 
large.  After  all,  it  is  your  habits  of  industry  and  thrift  that  do  most  to  bring  you  success 
in  life.     In  striving  for  success,  learn  to  think  of  the  bank  as  your  partner. 

NOTE:  This  Talk  is  to  be  delivered 
on  or  before  October  25,  1922,  after 
which  it  may  be  released  for  publication. 


SUGGESTIONS 

Talk  No.  2 

1.  In  presenting  this  Talk  the  speaker   should  have  with  him  for  the  purpose  of  illustra- 

tion, a  deposit  ticket,  a  pass  book,  and  a  check  with  stub  attached,  each  being  written 
out  as  indicated. 

2.  Speakers   are  requested  to   confine   themselves   to   the   subjects   treated   in   each   Talk   in 

order  not   to   encroach  upon   subjects   for  future  talks. 

3.  With  each  Talk  the  speaker  should  point    out   that   the   word    "Bank,"    wherever   used, 

refers  alike  to  Trust  Companies,  State  Banks,  and  National  Banks — in  short,  to  all 
banking  institutions  having  a  commercial  department. 

4.  Where  the  circumstances  permit,  questions   on   the   subject  may   be   invited   from   pupils 

after  the  talk  is  finished.  , 

5.  Each  Talk  should  be  accompanied  with  the  suggestion  that  pupils  speak  to  their  parents 

about  the  subject  presented. 

QUESTIONS  TO  BE  LEFT  WITH  THE  TEACHER 

1.  Describe  how  a  checking  account  may  be  opened  at  the  bank. 

2.  Trace  from   the   beginning  the  course  of  a  check  sejnt  to  a  distant 

city  in  payment  for  merchandise. 

3.  What  difficulties  would  business  men  have  in  paying  bills,  if  there 

were  no  banks.'' 

4.  Name   some   of  the  advantages  of  a  checking  account. 


1) 

Outline  for  Talk  No.  3 

LOANING  THE  BANK'S  MONEY 

I.  The  Discovmting  Fvmction 

A.  Earns  money  to  pay 

1.  Interest  on  savings  deposits 

2.  Expenses 

3.  Salaries   of  officers   and  employes 

4.  Dividends  to  stockholders 

B.  Three  C's   on  which   banker  bases   credit  , 

1.  Character,   shown  by   customer's  integrity  in  all  dealings 

2.  Capacity,  shown  by  customer's  ability  to  earn  through  honesty  and  industry 

3.  Capital,  shown  by  customer's  worth  in  money,  merchandise,  stocks  and  bonds, 
or  lands 

C.  Customer's  statement 

1.  Assets  (what  he  owns) 

a.  Cash  on  hand  or  in  bank 

b.  Notes   and  accounts  receivable 

c.  Merchandise 

d.  Buildings,  fixtures,   real  estate,  machinery 

e.  Stocks  and  bonds 

2.  Liabilities  (what  he  owes) 

a.  Accounts  and  notes  payable  to  banks  and  others 

b.  Mortgages,  and  so  forth 

D.  Methods  of  loaning  money 

1.  Straight   note — without   security 

2.  Endorsed  note — double  responsibility 

3.  Collateral  note — secured  by 

a.  Warehouse   receipts,   or   bills  of  lading 

b.  Stocks  and  bonds 

c.  Mortgages 

4.  Bills  receivable 

5.  Trade  acceptances 

6.  Bankers'  acceptances 

II.  Definition  of  Note 

A.  A  negotiable  promissory  note  is  an  unconditional  promise  in  writing  made  by  one 
person  to  another,  signed  by  the  maker,  engaging  to  pay  on  demand,  or  at  a 
fixed  or  determinable  future  time,   a  sum  certain  in  money,  to  order  or  to  bearer. 

B.  A  note  must  possess  the  following: 

1.  It  must  be  in  writing  and  signed  by  the  maker 

2.  It  must  contain  an  unconditional  promise  to  pay  a  definite  sum  in  money 

3.  It  must  be  payable  on  demand,  or  at  some  fixed  or  determinable  future  time 

4.  It  must  be  payable  to  order  or  to  bearer 

Copyright,  1922,  American  Bankers  Association 


(f 


Outline  for  Talk  No.  3 

LOANING  THE  BANK'S  MONEY 

I.  The  Discounting  Function 

A.  Earns  money  to  pay 

1.  Interest  on  savings  deposits 

2.  Expenses 

3.  Salaries   of  officers   and  employes 

4.  Dividends  to  stockholders 

B.  Three  C's   on  which   banker   bases   credit 

1.  Character,   shown  by   customer's  integrity  in  all  dealings 

2.  Capacity,  shown  by  customer's  ability  to  earn  through  honesty  and  industry 

3.  Capital,  shown  by  customer's  worth  in  money,  merchandise,  stocks  and  bonds, 
or  lands 

C.  Customer's  statement 

1.  Assets  (what  he  owns) 

a.  Cash  on  hand  or  in  bank 

b.  Notes  and  accounts  receivable 

c.  Merchandise 

d.  Buildings,  fixtures,  real  estate,  machinery 

e.  Stocks  and  bonds 

2.  Liabilities  (what  he  owes) 

a.  Accounts  and  notes  payable  to  banks  and  others 

b.  Mortgages,  and  so  forth 

D.  Methods  of  loaning  money 

1.  Straight    note — without   security 

2.  Endorsed  note — double  responsibility 

3.  Collateral  note — secured  by 

a.  Warehouse   receipts,   or   bills  of  lading 

b.  Stocks  and  bonds 

c.  Mortgages 

4.  Bills  receivable 

5.  Trade  acceptances 

6.  Bankers'  acceptances 

II.  Definition  of  Note 

A.  A  negotiable  promissory  note  is  an  unconditional  promise  in  writing  made  by  one 
person  to  another,  signed  by  the  maker,  engaging  to  pay  on  demand,  or  at  a 
fixed  or  determinable  future  time,   a  smn  certain  in  money,  to  order  or  to  bearer. 

B.  A  note  must  possess  the  following: 

1.  It  must  be  in  writing  and  signed  by  the  maker 

2.  It  must  contain  an  unconditional  promise  to  pay  a  definite  sum  in  money 

3.  It  must  be  payable  on  demand,  or  at  some  fixed  or  determinable  future  time 

4.  It  must  be  payable  to  order  or  to  bearer 

Copyright,   1922,  American  Bankers  Association 


* 


Talk  No.  3 
Public  School  Series 


LOANING   THE    BANK'S    MONEY 

ISSUED  BY 

Committee  on  Public  Education 
American    Bankers    Association 


The  word  "Bank,"  wherever  used,  refers  alike  to  trust 
companies,  state  banks  and  national  banks — in  short,  to 
all  banking  institutions  having  a  commercial  department. 


ONE  of  the  most  important  services  which  the  bank  renders  to  the  community  is  the  loaning  of 
money.  You  will  recall,  also,  that  through  this  function  the  bank  earns  money  with  which  to 
pay  interest  on  savings  deposits,  expenses,  salaries  of  its  officers  and  employes,  and  dividends 
to  its  stockholders.  The  extension  of  credit  to  those  who  need  financial  help  is  called  the  discounting 
function  of  the  bank. 

The  Three  G's  of  Credit 

The  banker  bases  credit  on  what  are  known  as  the  three  C's  of  credit — Character,  Capacity,  and 
Capital.  Because  of  the  importance  of  these  in  the  lives  of  business  men  and  women,  it  is  essential 
that  boys  and  girls  know  them.  To  be  the  kind  of  men  and  women  who  will  succeed  in  life,  it  is 
necessary  that  character  and  capacity  be  developed  conscientiously  during  school  life. 

Character  is  an  imperative  business  qualification.  It  is  not  formed  in  a  day.  Character  is  de- 
veloped through  honesty  and  industry  practiced  daily.  The  boy  or  girl  who  cheats  in  class  today — 
"putting  one  over  on  the  teacher" — or  who  is  dishonest  in  his  dealings  with  his  parents  or  friends, 
is  stamping  on  his  character  marks  of  dishonesty  which  in  later  life  will  count  against  him  and  his 
success  in  business  and  in  citizenship. 

Allied  with  character  is  Capacity.  Before  making  a  loan,  a  banker  takes  into  consideration,  in 
addition  to  character,  the  capacity  of  the  applicant- — that  is,  his  ability  to  earn  through  his  honesty 
and  his  industry. 

Capital  is  a  man's  worth  in  money,  merchandise,  stocks  and  bonds,  or  lands,  which  may  be  given 
as  collateral  to  secure  a  loan  or  make  it  safe. 

Today  we  shall  consider  some  of  the  methods  used  by  the  bank  in  loaning  money  or  extending 
credit.  In  all  cases,  a  promise  to  pay  must  be  entered  into,  in  the  form  either  of  a  note,  or  of  some 
other  credit  instrument. 

Let  us  again  consider  the  business  transactions  of  Mr.  Smith,  the  storekeeper,  who  found  it  ad- 
visable to  have  a  checking  account  at  the  bank.  He  now  finds  that  his  business  is  increasing,  and  that 
he  needs  a  larger  stock  of  goods.  Also,  some  of  his  customers  do  not  pay  cash,  and  their  accounts  must 
be  carried  until  "pay  day."  He  realizes  that  he  must  have  more  money  for  his  business,  so  he  goes  to 
his  bank  for  advice.  | 

The  Customer's  Statement 

The  banker  asks  Mr.  Smith  to  submit  a  statement  of  his  business,  showing  his  Assets  (what  he 
owns)  and  his  Liabilities  (what  he  owes),  just  as  in  the  case  of  the  bank  statement  which  we  considered 
in  the  first  Talk.  His  Assets  show  Cash  on  Hand  and  in  the  Bank,  Notes  and  Accounts  Receivable  (that 
is,  money  owed  to  him  by  others).  Merchandise,  Building,  Fixtures,  Real  Estate,  and  possibly  Stocks 
and  Bonds.    His  Liabilities  will  be  Accounts  and  Notes  Payable  (money  due  to  others). 

The  banker  will  most  probably  ask  Mr.  Smith  to  submit  such  a  statement  at  regular  intervals, 
at  least  once  a  year,  and  thus  he  will  know  at  all  times  just  how  Mr.  Smith's  business  stands  and  what 
progress  he  is  making.  The  banker  knows  the  character  and  responsibility  of  Mr.  Smith  from  his  ob- 
servation of  Mr.  Smith's  dealings  and  from  the  confidence  that  people  have  in  him. 

The  banker  finds  Mr.  Smith's  character,  statement,  and  the  progress  that  he  has  been  making, 
satisfactory,  and  is  glad  to  consider  the  best  method  of  loaning  him  the  needed  funds. 

Methods  of  Loaning  Money 

Money  is  loaned  by  banks  in  the  following  ways: 

(1)  On  a  straight  note,  which  means  that  a  man's  net  worth  and  business  standing  are  such 
that  the  bank  will  loan  to  him  without  security. 

Copyright,  1922,  American  Bankers  Association 


* 


(2)  On  an  endorsed  note,  which  means  that  the  banker  desires,  in  addition  to  the  responsibility 
of  the  maker  of  the  note,  the  added  responsibility  of  some  person,  in  whom  he  has  confidence,  who 
will  consent  to  endorse  the  note. 

(3)  On  a  collateral  note,  which  means  that  the  maker  of  the  note  pledges  specific  securities, 
such  as  stocks  and  bonds,  or  goods  in  warehouse  or  under  bill  of  lading,  or  a  lien  or  mortgage  on 
land. 

(4)  On  bills  receivable,  which  means  that  the  banker  accepts  for  discount  the  bills  receivable 
from  his  customer  if  these  are  made  by  responsible  business  men  and  if  the  customer  is  a  responsible 
person. 

(5)  On  trade  acceptances,  which  means  that  the  banker  also  discounts  the  trade  acceptances  of 
his  responsible  customers. 

Definition  of  Note 

A  negotiable  promissory  note  is  an  unconditional  promise  in  writing  made  by  one  person  to 
another,  signed  by  the  maker,  engaging  to  pay  on  demand,  or  at  a  fixed  or  determinable  future  time, 
a  sum  certain  in  money  to  order  or  to  bearer. 

Straight  Note 

Mr.  Smith  is  told  by  the  banker  that,  because  he  makes  a  satisfactory  statement,  which  means  that 
he  has  a  sufficient  amount  of  money  in  his  business  and  manages  his  business  well,  the  bank  will  ex- 
tend him  a  certain  amount  of  credit  without  his  putting  up  any  security  beyond  his  own  word  of  honor, 
evidenced  by  his  note.  Let  us  say  that,  in  order  to  buy  a  larger  stock  of  goods,  and  to  carry  his  cus- 
tomers who  cannot  pay  cash,  Mr.  Smith  needs  a  maximum  amount  of  $2500  during  his  busiest  season, 
and  that  the  bank  has  consented  to  grant  him  such  a  line  of  credit.  This  would  mean  that  Mr.  Smith 
could  come  to  the  bank  and  make  out  a  note  for  any  portion  of  this  amount,  or  for  all  of  it,  for  any 
time  up  to  six  months.  To  pay  some  bills  he  needs  $500.  He  estimates  that  within  sixty  days  he  will 
receive  from  those  who  have  had  their  purchases  charged,  enough  money  to  repay  this  amount.  He, 
therefore,  makes  a  sixty-day  note,  which  the  banker,  discounts  at  the  prevailing  rate  of  interest,  let  us 
say  6%,  and  places  the  proceeds  to  Mr.  Smith's  credit.  How  much  does  he  credit  to  Mr.  Smith's  ac- 
count? 6%  on  $500  for  sixty  days  equals  $5.  This  amount  the  banker  deducts  at  the  time  the  note 
is  made,  it  being  the  interest  which  he  charges  Mr.  Smith  for  the  use  of  the  money.  He  then  credits 
Mr.  Smith  with  the  proceeds  of  the  note,  or  $495.  When  the  note  is  due  in  sixty  days,  Mr.  Smith  has 
received  payment  from  his  customers,  and  he  pays  the  bank  $500.  The  bank  cancels  the  note,  that 
is,  marks  it  paid,  and  returns  it  to  Mr.  Smith. 

Endorsed  Note 

If  Mr.  Smith's  statement  to  the  banker  were  not  sufficiently  strong  to  warrant  granting  him  a  line 
of  credit  entirely  unsecured,  the  banker  might  say  to  Mr.  Smith,  "You  will  have  to  get  the  endorsement 
of  your  friend,  Mr.  Jones."  Should  Mr.  Jones,  who  is  known  to  the  banker  as  a  very  reliable  and  re- 
sponsible business  man,  be  willing  to  help  Mr.  Smith,  he  would  be  required  to  write  his  name  on  the 
back  of  Mr.  Smith's  note.  Should  Mr.  Smith  be  unable  to  pay  his  note  when  it  matures,  that  is,  be- 
comes due,  Mr.  Jones  will  have  to  pay.  Mr.  Jones'  act  in  writing  his  name  on  the  reverse  side  of  the 
note  has  constituted  a  contract  with  the  banker  to  pay  Mr.  Smith's  note,  if  Mr.  Smith  does  not  pay  it. 

Collateral  Note — ^Warehouse  Receipts 

In  another  case,  the  banker  might  say  to  Mr.  Smith,  "I  shall  be  willing  to  loan  you  up  to  $2500, 
but  you  must  secure  the  loan  with  the  goods  which  you  purchase  for  that  amount,  and  with  some  ad- 
ditional goods."  Mr.  Smith  would  be  compelled  so  to  warehouse  the  merchandise  used  as  collateral 
that  it  might  be  easily  identified  through  warehouse  receipts  as  being  the  property  of  the  bank  until 
Mr.  Smith's  note  was  paid.  If  Mr.  Smith  finally  found  himself  unable  to  pay  his  note,  it  would  be- 
come the  banker's  privilege  to  sell  the  merchandise  which  had  been  warehoused  and  set  aside  as  col- 
lateral, and  to  use  the  proceeds  thereof  to  pay  the  note;  in  the  event  that  the  sale  of  the  goods  brought 
more  than  the  amount  of  the  note,  the  bank  would  pay  the  excess  to  Mr.  Smith,  or  if  the  amount 
realized  were  insufficient  to  pay  the  note,  the  bank  would  look  to  Mr.  Smith  to  pay  the  difference. 

Collateral  Note — Stocks  and  Bonds 

In  the  event  that  stocks  or  bonds  are  used  as  collateral,  the  stocks  or  bonds  themselves  will  be 
left  with  the  bank,  and  the  bank  will  be  privileged  to  sell  them  upon  non-payment  of  the  note  when  due, 


and  to  treat  the  proceeds  just  as  in  the  case  of  the  merchandise.  All  of  us  have  seen  bonds  of  the 
United  States  Government  called  Liberty  Loan  bonds  (Illustrate).  We  know  also  that  there  are  bonds 
of  the  county,  town,  or  city  in  which  we  live  called  municipal  bonds.  We  know  that  the  great  railway 
systems  of  the  country  and  great  industries,  like  the  United  States  Steel  Corporation,  borrow  money 
by  issuing  bonds,  secured  largely  by  real  estate,  or  other  property  used  in  their  business,  and  payable 
in  ten,  twenty,  thirty,  or  more  years,  during  which  time  the  lender  (the  owner  of  the  bond)  is  paid 
interest  for  the  use  of  his  money.  Shares  of  stock  of  great  industries  and  of  local  business  concerns 
show  that  the  stockholder  is  a  part  owner  of  the  enterprise.  For  such  securities  there  is  a  price  at 
which  they  can  be  bought  and  sold,  which  is  called  the  market  value.  Many  persons  own  Liberty  and 
other  bonds  and  stocks.    Many  of  you  have  invested  in  War  Savings  securities. 

Collateral  Note— Mortgages 

Loans  against  farm  lands  are  frequently  made  in  country  districts,  and,  from  the  standpoint  of  se- 
curity, have  many  advantages.    These  loans  are  called  mortgage  loans. 

If  Mr.  Smith's  statement  were  such  that  the  banker  felt  that  he  could  not  give  him  a  line  of 
credit  on  his  straight  note,  and  were  Mr.  Smith  unable  to  procure  a  satisfactory  endorser,  or  secure 
the  loans  with  merchandise  or  stocks  and  bonds,  yet  had  a  farm  free  from  debt,  and  of  sufficient  worth, 
he  might  give  the  banker  a  mortgage  on  his  farm  as  security.  This  would  mean  that  he  would  give 
the  banker  the  right  to  sell  the  farm  in  the  event  that  he,  Mr.  Smith,  did  not  pay  his  note. 

The  procedure  in  regard  to  loans  on  land  is  somewhat  different,  however,  from  that  of  loaning 
against  stocks  and  bonds,  or  merchandise.  Whenever  the  banker  sells  collateral,  he  must  be  careful 
that  the  sale  is  of  such  a  nature  that  the  borrower  can  never  hold  him  for  not  having  received  enough 
for  the  collateral.  Thus  it  is  that  sales  of  collateral  are  usually  made  in  public  after  public  notice  of 
the  sale  has  been  given.  But  there  are  further  legal  requirements  in  the  foreclosure  of  a  mortgage.  The 
law,  realizing  the  useful  place  which  the  farm  owner  and  the  home  owner  occupy  in  our  social  scheme, 
protects  each  in  a  special  manner  when  loans  are  made  on  his  land.  In  the  desire  to  protect  him,  the 
law  says  to  the  lender,  "You  must  give  this  owner  of  land  one  year  (which  is  the  usual  time  after  serv- 
ing notice  upon  him  that  you  expect  to  sell  his  land),  for  the  purpose  of  paying  his  mortgage  and  re- 
deeming his  debt."  This  period  is  called  the  period  of  redemption.  Many  city  banks  prefer  not  to 
make  mortgage  loans  on  the  theory  that  a  bank  should  have  its  money  so  loaned  that  it  can  be  collected 
easily  and  readily  on  the  date  of  maturity,  rather  than  at  the  end  of  a  long  period  of  redemption.  The 
security  element,  as  you  see,  does  not  enter  into  consideration  here,  since  farm  loans,  when  well  made, 
are  usually  very  secure.  It  is  the  lack  of  liquidness,  or  easy  collectibility,  which  makes  them  undesir- 
able bank  collateral. 

Bills  Receivable 

Mr.  Smith  has  still  another  method  open  to  him  for  obtaining  funds  from  his  banker.  He  has 
sold,  let  us  say,  a  considerable  bill  of  merchandise  to  a  dealer  in  a  smaller  community,  who  wishes  first 
to  sell  the  goods  to  his  customers  before  paying  Mr.  Smith.  The  bill  of  goods,  which  Mr.  Smith  has 
thus  sold,  amounts  to  $500.  Mr.  Smith  says  to  Mr.  Brown,  the  dealer  in  the  neighboring  community, 
"If  you  cannot  pay  me  cash,  give  me  your  ninety-day  note  for  the  amount  of  the  bill  of  goods."  This 
Mr.  Brown  consents  to  do.  Mr.  Smith  then  takes  Mr.  Brown's  note  to  the  bank,  and  asks  the  banker  to 
give  him  credit  for  the  note.  As  this  note  was  taken  by  Mr.  Smith  from  Mr.  Brown  as  an  accommoda- 
tion to  Mr.  Brown,  Mr.  Smith  says  to  Mr.  Brown,  "Because  I  am  compelled  to  pay  6%  interest  to 
my  banker  to  get  the  cash  on  your  note,  since  you  cannot  pay  cash,  I  shall  want  you  to  pay  that  in- 
terest." Mr.  Brown,  therefore,  makes  his  ninety-day  note  for  $500  and  interest  at  6%.  This  means 
that  Mr.  Brown  will  have  to  pay  at  the  end  of  ninety  days  $500  in  principal  and  6%  interest,  $7.50, 
or  a  total  of  $507.50.  When  Mr.  Smith  takes  this  note  to  the  bank,  the  bank  gives  him  credit  for  $500. 
However,  when  the  bank  collects  the  note,  it  collects  $507.50,  the  $7.50  being  its  charge  for  the  use  of 
the  money. 

Trade  Acceptances 

Mr.  Smith  might  have  taken  from  Mr.  Brown  a  commercial  instrument  which  is  coming  much 
into  use  today,  and  serves  practically  the  same  purpose  as  does  the  note.  It  is  known  as  a  Trade  Ac- 
ceptance. In  evidence  of  the  trade,  that  is,  the  sale  of  the  merchandise  by  Mr.  Smith  to  Mr.  Brown, 
Mr.  Brown  accepts  a  draft  drawn  on  him  by  Mr.  Smith  at  the  time  the  goods  are  shipped,  and  made  for 
the  time  Mr.  Brown  feels  that  it  will  take  him  to  sell  the  merchandise,  and  for  the  cost  of  the  mer- 
chandise. This  serves  to  acknowledge  the  trade  in  all  of  its  conditions;  that  is,  the  acceptor,  Mr.  Brown, 
indicates  by  writing  his  name  across  the  face  of  the  draft  that  he  has  received  the  merchandise  which 
he  purchased,  that  it  is  satisfactory,  and  that  he  has  agreed  to  pay  for  it  in  ninety  days. 


Bankers'  Acceptances 

The  Banker's  Acceptance,  too,  is  a  comparatively  new  instrument.  It  differs  from  the  trade  ac- 
ceptance in  the  fact  that  Mr.  Brown,  who  ultimately  pays  the  S500  for  his  purchase  of  merchandise, 
instead  of  accepting  Mr.  Smith's  draft  himself,  arranges  with  his  bank  to  do  so;  and  when  the  period 
of  ninety  days  has  elapsed,  by  agreement  made  beforehand,  he  turns  over  to  the  bank  the  funds  to  pay 
the  acceptance.  You  will  observe  that  the  bank  does  not  loan  its  funds  in  this  case.  The  guarantee  of 
the  bank  establishes  the  credit,  for  which  Mr.  Brown  pays  a  small  commission.  The  banker's  accep- 
tance is  used  mainly  in  large  transactions  and  in  foreign  business. 

Should  People  Borrow  Money? 

We  have  now  outlined  the  main  methods  of  making  bank  loans.  Some  people  think  that  to  incur 
a  debt  at  the  bank  is  in  itself  unwise,  or  a  reflection  on  their  business  standing.  Certainly  this  is  not 
the  case  where  the  debt  is  contracted  for  legitimate  business  purposes.  Incurring  a  debt  so  that  one 
may  live  beyond  one's  income  is  something  that  no  thrifty  person  would  do.  Careless  use  of  credit 
leads  to  extravagance  and  disaster,  but  wise  borrowing  is  an  encouragement  to  thrift  and  industry. 
Oftentimes  it  is  advisable  to  go  into  debt  for  goods  or  property,  or  to  borrow  money  to  make  a  profit- 
able investment  that  would  not  otherwise  be  possible.  Many  a  successful  business  man  will  tell  you 
that  his  business  was  unprofitable  until  he  borrowed  money.  The  obligation  itself  made  him  put  forth 
every  effort  to  make  the  enterprise  successful,  and  to  save  part  of  his  income  in  order  to  pay  the  debt. 
The  necessity  for  repayment  made  him  more  careful  and  energetic. 

You  will  understand  from  previous  Talks,  that  the  first  function  of  the  banker  is  to  encourage  in- 
dustry and  thrift,  so  that  a  large  fund  of  deposits  may  be  accumulated.  This  fund  is  often  likened  to  a 
reservoir  in  which  water  is  accumulated  for  community  needs.  The  banker  then  loans  from  this  fund 
to  those  furthering  the  business  of  the  community,  so  that  wages  may  be  paid  which,  when  saved,  create 
new  deposits.  We  see,  in  these  processes,  the  interdependence  of  all  who  constitute  a  community. 
First,  through  work  we  produce;  then  the  sale  of  what  is  produced  pays  wages;  the  savings  from  these 
wages  are  lodged  in  the  bank;  the  bank  then  uses  these  accumulated  savings  to  loan  further  sums,  so 
that  we  may  continue  to  work  and  save. 

Very  few  business  men  can  so  conduct  their  business  affairs  that  at  no  time  will  they  need  to 
borrow  money.  Situations  are  constantly  arising  in  which  the  help  of  the  bank  is  required.  How  im- 
portant it  is  that  our  personal  conduct  now,  when  we  are  building  character  and  capacity,  be  such 
that  in  the  conduct  of  our  affairs  later  on,  when  striving  for  success  in  business  and  life,  we  shall  merit 
the  confidence  and  help  of  the  bank. 

NOTE:  This  Talk  is  to  be  delivered 
on  or  before  November  25,  1922,  after 
which  it  may  be  released  for  publication. 

SUGGESTIONS 

1.  In  presenting  this  Talk  the  speaker  should  have  with  him  for  the  purpose   of  illustration   a 

plain  promissory  note  (either  single  name  or  joint  and  several),  a  collateral  note,  and  an 
acceptance  form  of  draft.  It  would  also  be  of  help  to  exhibit  the  other  forms,  such  as  mort- 
gage, warehouse  receipt,  and  bill  of  lading. 

2.  Please  refer  to  list  of  suggestions  accompanying  previous  Talks. 

QUESTIONS  TO  BE  LEFT  WITH  THE  TEACHER 

1.  When  credit  is  needed  for  business  purposes,  through  what  source  is  it  or- 

dinarily obtained? 

2.  Is  it  wise  to  keep  the  bank  fully  informed  regarding  one's  business  affairs? 

Why? 

3.  If  you  have  money  invested  in  goods,  stocks  or  bonds,  how  can  they  best  be 

used  when  you  need  cash?     Explain  the  method. 

4.  Describe  the  form  in  which  real  estate  loans  are  handled. 

5.  Explain  the  purpose  of  the  warehouse  receipt  and  the  bill  of  lading.   Why 

does  the  bank  loan  money  on  this  security? 

6.  What  is  a  trade  acceptance?    Tell  why  it  is  a  desirable  form  for  granting 

credit  to  business  men? 

7.  When  may  a  debt  be  termed  unwise  ? 

8.  (For  advanced  pupils)     Describe  the  banker's  acceptance. 


Outline  for  Talk  No.  4 

CHARACTER— THE  BASIS  OF  BANK  CREDIT 

I.  Credit 

A.  Use  of  term 

1.  Money  deposited   is   credited  to  depositor's  account 

2.  In  loaning  money,  a  banker  extends  a  line  of  credit 

3.  Money  on   endorsed  note  is  extended  on  joint  credit 

4.  Bonds  are  issued  on  credit  of  corporation,  railway,  or  government 

B.  Basis 

1.  Credit  implies   confidence,   and   confidence  rests  on  character 

a.  Honesty,  industry   and  thrift  are  necessary  to  strong  character  and  busi- 
ness success 

(1)  Credit   standing  of   business  concerns  is  usually  known  to  banks 

(2)  A  man  must  pay  what  he  owes.     Never  contract  a  debt  which  you 
are  not   reasonably  sure  of  paying 

b.  "Every  good  tree  bringeth  forth  good  fruit,  but  a  corrupt  tree  bringcth 
forth  evil  fruit." 

2.  Good  management  is  shown  by  ability  to  save  money 

C.  Examples  of  wise  uses  of  credit 

1.  It  is  desirable  to  contract  a  debt 

a.  For  the  purchase  of  a  home 

b.  To  complete  one's  education 

c.  To  purchase  good  bonds 

D.  Examples  of  unwise  uses  of  credit 

1.  It  is  undesirable  to  contract  a  debt 

a.  For  speculative  ventures 

b.  For  pleasure-giving  possessions 

II.  Character  in  Bank  Management 

A.  Officers  and  bank  command  confidence  and  respect  by  adhering  to  same  standards 
as  expected  of  patrons :  irreproachable  business  methods,  sound  standards,  capable 
management 

III.  Need  for  Banking  Education 

A.  People  should  understand  that  banks  are  trustees  of  their  deposits,  and  must 
safely   guard   and  safely   invest   them 

B.  Banks   are  public  servants   and  are  managed  and  examined  in  the  public  interest 

C.  Bankers  are  human,  and  may  make  mistakes,  but  they  are,  as  a  rule,  of  high 
integrity,  and  are  eager  to  serve 

D.  A  better  understanding  of  bankers  and  banks  will  bring  greater  benefits  to  com- 
munity  and  country 

IV.  Historical  Allusion 

A.  As  examples  of  strong  character,  built  upon  the  strict  policy  of  honesty,  industry, 
and  thrift,  consider  Abraham  Lincoln  and  Benjamin  Franklin. 

NOTE:     Additional  literature  on  Honesty  may  be  secured  by  ad- 
dressing National   Honesty   Bureau,    115  Broadway,  New  York  City. 

Copyright,  1922,  American  Bankers  AssociatioD 


Cm 


Talk  No.  4 
Public  School  Series 

.       CHARACTER 
THE  BASIS  OF  BANK  CREDIT 

ISSUED  BY 

Committee  on  Public  Education 
American     Bankers    Association 


The  word  "Bank,"  wherever  used,  refers  ahke  to  trust 
companies,  state  banks  and  national  banks — in  short,  to 
all  banking  institutions  having  a  commercial  department. 


IN  former  Talks  on  "Taking  the  Mystery  Out  of  Banking,"  you  have  been  told  of  a 
number  of  transactions  that  make  up  a  part  of  the  daily  round  of  a  bank's  work.  These 
have  revealed  certain  business  ideals  and  business  methods,  STANDARDS  OF  ACTION, 
we  might  call  them,  which  are  adhered  to  both  by  the  bank  and  by  all  who  rightly  use  its 
services.  You  will  recognize  that  the  basis  of  all  bank  credit  as  well  as  all  business  credit 
is  CHARACTER. 


The  Meaning  of  Credit 

In  banking,  the  word  "credit"  has  various  meanings.  We  say  banks  deal  in  credit.  For 
example,  when  you  deposit  money,  your  account  receives  credit  for  the  amount  deposited, 
and  the  bank  continues  to  owe  you  until  you  withdraw  your  money.  Again,  in  business 
language,  the  bank  extends  "a  line  of  credit"  to  a  customer  by  agreeing  to  lend  him  reason- 
able amounts  whenever  he  needs  money.  When  you  borrow  money  on  your  note  at  the 
bank,  you  are  granted  credit  because  of  your  promise  to  repay.  When  you  endorse  the 
note  of  a  friend  who  borrows  money  from  the  bank,  the  loan  is  made  upon  the  joint  credit 
of  both ;  if  your  friend  does  not  pay  the  note  when  due,  you  are  required  to  pay  it.  When 
a  railroad,  a  manufacturing  concern,  a  town,  or  a  government  issues  bonds,  it  uses  its  credit. 
Those  who  bu}-^  the  bonds  rely  for  repayment  of  their  money,  when  the  bonds  mature,  upon  the 
maker's  credit  standing  and  promise  to  pay.  When  a  merchant  buys  goods  without  paying 
cash,  at  the  time  of  purchase,  credit  is  granted  him.  When  goods  are  sold  over  the  counter 
to  a  customer  who  carries  a  charge  account,  credit  is  granted.  In  both  cases,  credit  is 
granted  in  the  belief  that  later  on  the  bills  will  be  paid.  Thus  credit  enters  into  all  busi- 
ness, and  particularly  into  the  business  of  banking.  Without  credit,  our  present  day  busi- 
ness system  could  not  exist. 

Credit  implies  confidence.  Credit  transactions  are  possible  only  because  people  have 
CONFIDENCE  in  each  other,  and  confidence  can  exist  only  where  good  character  exists. 
Without  good  character,  there  is  little  chance  of  sur-cess  in  any  business  undertaking.  The 
business  man  of  strong  character  has  fixed  habits  of  honesty,  industry,  and  thrift.  Like 
Longfellow's  "Village  Blacksmith,"  he  can  "look  the-  whole  world  in  the  face".  He  has  noth- 
ing to  conceal.  When  he  needs  the  help  of  the  bank,  he  presents  to  the  banker  all  the  facts 
concerning  the  financial   situation,   ar'].   because   he   deals    openly    and    frankly,  he  wins   the 

Copyrighi,  1922,  American  Bankers  Association 


4 

banker's  confidence,  and  sound  advice  as  to  the  right  course  to  pursue.  Bankers  are  in 
constant  touch  with  the  credit  standing  of  local  business  concerns,  and  have  much  to  do  with 
their  general  reputation.  Every  successful  business  man  looks  upon  his  credit  standing  at 
the  bank  as  a  most  valuable  asset,  and  he  maintains  it  by  square  dealing.  He  knows  that 
the  bank  can  help  him  in  many  ways  to  establish  and  maintain  a  good  business  and  credit 
reputation. 

There  is  truth  in  the  old  adage,  "honesty  is  the  best  policy".  It  pays  to  be  honest. 
Doubtless  there  are  a  few  men  who  are  honest  in  business  largely  because  it  does  pay,  but 
most  men  are  successful  in  their  business  and  in  their  lives,  because  their  characters  are  built 
on  the  policy  of  honesty  and  industry. 

A  MAN  MUST  PAY  WHAT  HE  OWES.  If  he  refuses  to  pay  his  debts,  it  soon  be- 
comes known  that  he  is  not  of  good  character,  and  is  not  worthy  of  confidence.  Those  from 
whom  he  would  buy,  refuse  to  trust  him.  The  bank  declines  to  grant  him  credit.  Then 
come  business  failure,  and  a  long  up-hill  fight  to  get  on  his  feet  again,  and  to  live  down  the 
mistakes  and  dishonor  of  the  past.  The  habit  of  honesty  should  be  formed  early  in  life, 
and  adhered  to  under  every  circumstance.  Make  it  your  fixed  purpose  never  to  contract  a 
debt  that  you  are  not  reasonably  sure  of  being  able  to  pay. 


Good  Management 

Honesty  is  not  the  only  factor  involved  in  credit.  One  may  be  extremely  careful  to 
keep  promises  or  agreements,  and  yet  may  not  deserve  credit  at  the  bank.  Here,  for  instance, 
is  Mr.  Jones,  a  man  of  forty,  of  excellent  morals,  who  has  enjoyed  a  fair  income  for  many 
years,  and  who  now  sees  an  opportunity  to  purchase  a  business  for  himself.  He  requires 
financial  assistance.  He  calls  on  a  banker,  who  has  known  him  for  a  long  time,  and  asks 
how  he  may  obtain  the  necessary  credit.  The  banker  inquires  as  to  the  nature  of  the  busi- 
ness, what  the  cost  will  be  to  purchase  it,  and  what  Mr.  Jones  can  command  in  ready  money, 
or  other  resources.  The  banker  learns  that  Mr.  Jones,  at  the  age  of  forty,  has  no  money, 
or  property  of  his  own.  It  is  clear  to  the  banker  that  Mr.  Jones  lacks  the  ability  to  man- 
age wisely  his  affairs.  He  has  not  had  enough  determination  and  strength  of  character  to 
save  money.  He  has  not  learned  to  adapt  his  expenses  to  his  income,  and  so  has  not  yet 
proved  that  he  could  make  financial  progress,  even  under  more  favorable  circumstances. 
Moreover,  it  is  usually  true  that,  if  men  do  not  invest  some  of  their  own  money,  that  is, 
have  an  interest  in  the  business  they  take  up,  they  lack  incentive  and  become  easily  dis- 
couraged. The  business  lags  and  eventually  fails,  in  which  case,  those  who  have  provided 
the  capital  for  it  lose  their  investment.  The  banker  knows  that  it  would  not  be  wise  for 
anyone  to  assume  such  a  financial  risk,  and  Mr.  Jones  probably  finds  that  the  bank  can  do 
nothing  for  him.     He  must  give  up  his  opportunity  to  some  one  else  who  has  saved  money. 

Banks  are  public  servants,  but  that  does  not  place  them  under  obligation  to  serve  those 
who  are  unfair  in  their  business  dealings  or  who  are  lacking  personally  in  the  great  princi- 
ples underlying  opportunity.  Therefore,  to  be  known  as  a  careful  and  thrifty  person  is  the 
best  assurance  that  the  bank  will  extend  financial  help  when  it  is  needed. 

How  essential  it  is  that  each  of  us  cultivates  the  habit  of  saving!  On  every  hand  we 
see  reckless  waste.  It  is  not  always  easy  to  practice  thrift,  but  such  practice  leads  to  suc- 
cess. The  ability  to  save  money,  even  in  a  small  way,  has  much  to  do  with  future  business 
success  and  prosperity.  Some  one  has  said,  "Opportunity  does  business  on  a  strictly  cash 
basis.     She  smiles  upon  those  with  a  bank  account,  and  laughs  at  those  without  one." 


]^ 


Mistaken  Ideas  About  Owing  Money 

Many  people  who  are  unfamiliar  with  business  think  that  one  should  shun  contracting 
a  debt,  as  one  would  shun  an  attack  of  malaria.  They  fail  to  distinguish  between  con- 
tracting wise  and  unwise  debts.  It  is  desirable  and  wise  to  use  one's  credit,  that  is,  go 
into  debt,  for  the  purchase  of  a  home,  because  such  a  debt  encourages  the  family  to  save, 
and  to  live  on  a  sound  basis.  The  earnest  young  student  should,  if  necessary,  borrow  a 
reasonable  amount  of  money  to  complete  his  education.  This  is  an  investment  in  personal 
ability,  and  will  pay  dividends  in  greater  success.  Another  wise  use  of  credit  is  to  borrow 
for  the  purpose  of  buying  good  bonds.  Suppose  you  desire  to  buy  a  Liberty  Bond  for  $100. 
You  can  pay  $20  down,  borrow  $80  from  the  bank,  and  pay  this  latter  amount  out  of  sav- 
ings. Such  a  debt  would  be  regarded  as  a  wise  investment,  and  would  help  you  to  financial 
success,  because  you  would  save,  in  order  to  pay  the  amount  borrowed.  Many  a  prosper- 
ous business  man  began  his  fortune  with  such  accumulations. 

There  are  circumstances,  however,  under  which  one  should  never  borrow  money.  Never 
incur  a  debt  in  a  speculative  venture.  Many  people  become  afflicted  with  the  "get-rich- 
quick"  fever.  In  their  attempt  to  gain  sudden  wealth,  they  invest  not  only  their  own 
money,  but  often  that  borrowed  from  others.  Beware  of  the  lust  for  easy  money!  OF 
THE  PEOPLE  WHO  SPECULATE,  NINETY-FIVE  PER  CENT  LOSE. 

Neither  should  debts  be  incurred  for  the  purchase  of  pleasure-giving  possessions.  Such 
debts  are  an  abuse  of  the  charge  account.  They  are  millstones  around  the  necks  of  count- 
less families.  The  person  who  lives  beyond  his  income,  is  destroying  the  very  rock  upon 
which  his  future  success  must  be  built. 

Life's  success  rests  on  the  principles  of  character.  "Every  good  tree  bringeth  forth 
good  fruit,  but  a  corrupt  tree  bringeth  forth  evil  fruit."  If  we  form  unwise  habits,  we  shall 
be  as  the  corrupt  tree,  which  is  hewn  down.  If  we  form  wise  habits,  we  shall  be  as  the  good 
tree,  and  enjoy  happiness  and  prosperity. 

Character  in  Bank  Management 

The  progressive  bank  adheres  to  the  same  standards  that  are  expected  of  its  patrons. 
Because  it  is  well  managed,  it  commands  the  confidence  of  its  customers.  Its  business 
methods  are  beyond  reproach.  It  excludes  business  of  doubtful  reputation.  It  has  no  part 
in  the  feverish  struggle  for  sudden  wealth,  but  holds  steadily  to  those  sound  standards  well 
known  to  all  successful  men  of  affairs.  Well-managed  banks  are  regarded  with  great  re- 
spect, and  they  assume  a  place  of  ever  increasing  importance  in  the  business  life  of  the  com- 
munity. With  the  bank,  as  with  the  individual,  success  is  a  matter  of  character  and 
capable  management. 

Need  for  Banking  Education 

Some  thoughtless  people  criticize  banks,  because  they  do  not  make  loans  more  freely. 
It  must  be  remembered  that  the  bank  whose  business  it  is  to  receive  deposits,  as  well  as  to 
grant  loans,  stands  chiefly  as  a  trustee  of  the  money  belonging  to  its  depositors.  It  has  the 
care  and  control  of  their  funds,  and  must  so  hold  and  invest  these  as  to  insure  their  return, 
upon  demand,  to  the  depositor.  Aside  from  the  safeguards  thrown  about  bank  deposits  by 
law,  such  as  the  required  legal  reserve  referred  to  in  a  previous  talk,  and  regular  examina- 
tions  of  all   banks  by   either  the  Federal,   or    State   Banking   Commissioners,    the   banker's 


t 


judgment  and  experience  must  dictate  the  course  to  be  followed  by  his  bank.  He  must 
know  when  to  expand  his  loans,  and  when  to  curtail  them.  Being  hmnan,  bankers  also  make 
mistakes  of  judgment.  As  a  rule,  they  are  men  of  high  business  integrity,  eager  to  serve 
their  communities ;  men  who  deserve  pubhc  confidence  and  good  will.  When  the  public  thor- 
oughly understands  the  workings,  and  services  of  the  bank,  greater  benefits  will  be  derived 
by  the  community  and  by  our  country  as  a  whole. 

NOTE:  Additional  literature  on 
Honesty  may  be  secured  by  addressing 
National  Honesty  Bureau,  115  Broad- 
way, New  York  City. 

NOTE:  This  Talk  is  to  be  delivered 
OK  or  before  December  26,  1922,  after 
which  it  may  be  released  for  publication. 


QUESTIONS  TO  BE  LEFT  WITH  THE  TEACHER 

1.  How  does  credit  enter  into  bank  transactions? 

2.  What  has  character  to  do  with  credit .''    Explain. 

3.  How  can  you  establish  confidence  in  your  ability  to  manage.'' 

4.  Why  is  it  difficult  to  get  credit  with  which  to  start  in  business,  if 

you  have  no  money  of  your  own? 

5.  What  is  meant  by  "character"  in  bank  management? 


Outline  for  Talk  No.  5 

WHY  A  CORPORATE  TRUSTEE? 

I.  Administration  of  the  Estate 

A.  Disposition  of  estate 

1 .  By  will ;  every  person  of  legal  age  can  make  a  will 

2.  If  no  will  is  left,  law  declares  disposition  of  estate,  and  heirs  may  have  indi- 
vidual or  trust  company  appointed  administrator 

B.  Executor  or  administrator 

1.  Title  given   to  person  or  company'  named  to  administer  estate 

a.  Executor,  named  in  will 

b.  Administrator,  named  by  heirs  or  court 

2.  Duties 

a.  To  take  charge  of  all  money  in  bank,  stocks,  bonds,   real  estate,  crops, 
and  other  property  on  hand 

b.  To  settle  estates ;  property  may  be  sold  in  order  to  paj'  debts  and  expenses 

c.  To  turn  remainder  over  to  heirs  after  all  expenses  and  debts  have  been 
paid 

3.  A  trust   company   or  bank   preferred   above   individual 

C.  Guardian 

1.  Appointed,  either  in  will  or  by  court  for  child  under  legal  age 

2.  Duties 

a.  To  use  money   for  child's  maintenance  and  education 

b.  To  account  to  court  Avhcn  child  becomes  of  age  and  estate  is  turned  over 

3.  Corporate  guardian  usually  more  satisfactory  than  individual 

D.  Trustee 

1.  One  named  to  hold  or  manage  property  for  the  benefit  of  others  during  their 
lifetime 

2.  Corporate  trustee 

a.  A    well-organized,    financially    responsible,    perpetual    corporation    under 
strict  supervision  of  the  state 

b.  May  be  a  trust  company  or  qualified  bank 

c.  Required  by  law   to  keep   funds  for  each  estate  separate 

d.  Experience   sliows   their   dealings  uniformly  kind  and  sympathetic 

E.  Business  trusteeship 

1.  Trustee  named  to   continue  management   of   business,    after   death   of   owner, 
for  benefit  of  heirs 

2.  Corporate  trustee  preferred  above  individual 

a.  Complex   laws,   taxes,   accounting,  and  so   forth,  make  administration  of 
estate  difficult  for  any  individual 

b.  Officers   of  trust   companies,  or  banks  authorized  to  perform  such  services, 
experienced,  trained,   and  equipped  in  these  principles,  laws,  and  duties 

c.  Has  means  of  providing  special  financing 

Coprrlsht,  1922,  Amerlcaii  Bankera  AjwoclaUoa 


Ir 


Talk  No.  5 
Public  School  Series 


WHY  A  CORPORATE  TRUSTEE? 

ISSUED  BY 

Committee  on  Public  Education 
American    Bankers    Association 


THERE  is  a  service  rendered  by  trust  companies  and  many  other  banks,  which,  sooner 
or  later,  is  needed  by  every  person  owning  property.  Under  our  law,  every  person 
has  a  right  to  own  property,  and  to  transfer  it  to  others.  Property  may  be  passed 
on  as  a  gift,  during  the  lifetime  of  the  owner.  Suppose,  however,  a  property-owner  dies. 
What  then  becomes  of  his  property? 


The  Right  to  Make  a  Will 

The  law  permits  every  person  of  legal  age  to  make  a  will,  designating  to  whom  his 
property  shall  go,  and  whom  he  desires  to  manage  it  after  he  dies.  Where  no  will  is 
left,  the  law  declares  that  a  person's  property  shall  be  used  first  to  pay  his  debts,  and  that 
the  remainder,  if  any,  shall  go  to  his  next  of  kin.  The  law  states  exactly  who  is  to 
receive  the  property,  and  in  what  proportions.  If  a  person  fails  to  make  a  will,  his  heirs, 
in  order  to  pay  his  debts  and  distribute  what  is  left  among  the  members  of  his  family,  may 
have  an  individual,  or  better  still,  a  trust  company,  or  qualified  bank,  appointed  adminis- 
trator.    Where  a  will  is  left,  the  one  named  to  manage   the   estate   is    called   the   executor. 

It  is  the  duty  of  the  administrator  or  executor  to  take  charge  of  all  money  in  the  bank, 
stocks,  bonds,  real  estate,  crops  growing  in  the  fields,  and  all  other  property  on  hand  at 
the  death  of  the  owner.  Part,  or  all,  of  the  property  may  be  sold  in  order  to  pay  the 
debts  and  the  expenses  of  settling  the  estate.  Every  debt  must  be  taken  care  of  before 
distribution  is  made. 


Duties  of  Guardian 

When  a  child  under  legal  age  inherits  money  or  property,  there  must  be  a  guardian 
to  receive  the  money  or  property  and  manage  it  in  the  interest  of  the  child,  until  he  becomes 
of  age.  A  parent  can  name  a  guardian  for  his  children  in  his  will,  but  if  he  fails  to  make 
a  will,  the  Court  will  appoint  a  guardian  to  hold  and  invest  the  child's  property.  A  bond 
must  be  given  guaranteeing  the  safety  of  every  dollar.  It  is  the  duty  of  the  guardian  to 
use  this  money  for  the  child's  maintenance  and  education.  The  Court  insists  that  a  guardian 
must  first  of  all  provide  proper  food  and  clothing.  His  next  duty  is  to  see  that  the  child 
obtains  a  good  education.  By  consent  of  the  Court,  the  guardian  may  spend  whatever  is 
necessary  in  order  that  the  child,  his  ward,  may  be  equipped  for  life. 

When  the  child  becomes  of  age,  the  guardian  must  account  to  the  Court,  showing  in 
detail  how  he  has  managed  his  ward's  estate.  The  balance  remaining  on  hand  is  then  paid 
to  the  ward.  Experience  has  shown  that,  as  a  rule,  a  corporate  guardian  is  more  satisfactory 
than    an  individual.      The   growing  practice,   therefore,   is  to   appoint   a  trust   company   or 

Copyright,  1922,  American  Bankers  Association 


qualified  bank  as  guardian  of  the  estate  of  a  minor.  Officers  of  the  trust  company  or  bank 
supervise  the  buying  of  clothing  for  minor  children,  arrange  to  have  them  sent  to  good 
schools,  and  see  to  it  that  they  are  provided  with  wholesome  food  and  environment,  so  that 
they  may  grow  up  to  be  good,  strong,  healthy,  and  useful  men  and  women. 


Services  of  a  Trustee 

We  have  spoken  of  executors,  administrators,  and  guardians.  There  remain  trustee- 
ships. First  of  all,  what  is  a  trustee?  We  have  seen  that  an  executor  or  administrator  is 
one  who  settles  up  the  estate  and,  after  paying  the  debts  and  expenses,  turns  over  the 
remainder  to  those  entitled  to  receive  it.  A  trustee  is  one  who  holds  or  manages  property 
for  the  benefit  of  others.  As  a  rule,  a  trustee  is  named  in  a  man's  will  to  administer  his 
property  upon  his  death,  when  he  can  no  longer  work  for  his  wife,  children,  and  others  near 
and  dear  to  him.  The  trustee  manages  the  property  for  their  benefit.  Every  man  who 
has  proper  regard  for  his  family  desires  that  they  shall  be  protected  during  their  entire 
lifetime.  Most  wives  and  mothers  find  their  chief  interest  and  usefulness  in  the  home.  They 
feel  unable  or  reluctant  to  master  the  details  of  business.  Women,  who  inherit  money, 
which  has  been  accumulated  during  a  lifetime  by  a  husband  or  father,  are  often  the  victims 
of  designing  persons  who  succeed  in  taking  from  them  the  property  inherited.  Lacking  busi- 
ness ability  and  experience,  these  women  are  likely  to  make  unwise  investments,  and  thus  lose 
their  inheritance.  Therefore,  the  wise  course  is  to  appoint  a  trustee,  who  will  carefully 
manage  the  estate  for  the  benefit  of  the  heirs. 


The  Corporate  Trustee 

Formerly,  people  appointed  their  personal  friends  to  act  as  trustees  and  manage  their 
estates.  There  is  always  the  chance,  however,  that  the  friend  may  die,  become  ill,  or  go 
away  on  a  vacation.  He  may  abuse  the  confidence  placed  in  him,  or  he  may  lack  business 
ability.  He  may  be  busy  with  his  own  affairs  and  have  little  time  to  attend  to  an  estate. 
One  can  readily  see,  therefore,  that  a  well-organized,  financially  responsible,  perpetual  cor- 
poration under  strict  supervision  of  the  state,  such  as  a  trust  company  or  a  qualified  bank, 
is  better  equipped  to  act  as  trustee  of  estates  than  is  an  individual.  Corporate  trustees  are 
organized  for  this  very  purpose.  They  never  die.  They  do  not  go  on  vacations.  If  one  of 
their  officers  is  absent,  another  officer  takes  charge  of  his  duties,  thus  providing  continuous 
service- 
But,  you  ask,  do  not  corporate  trustees  sometimes  fail.''  Yes,  this  has  happened.  The 
safeguard  lies  in  the  fact  that,  under  the  law,  trustees  must  keep  the  money  and  other 
property  of  each  estate  separate  and  apart  from  the  money  and  property  of  every  other 
estate,  and  separate  and  apart  from  their  own  money.  You  see,  therefore,  that  if  a  corporate 
trustee  should  fail,  the  estates  under  its  care  are  still  secure.  Owing  to  this  requirement, 
each  estate  is  preserved  intact  and  secure.  In  very  few'  instances  has  any  trust  company  ever 
lost  a  dollar  of  the  trust  funds  committed  to  it. 

Some  may  say  that  the  corporate  trustee  is  lacking  in  personal  touch  with  people,  that 
it  does  not  sympathize  with  the  troubles,  sorrows,  and  difficulties  of  families,  that  it  does 
not  concern  itself  about  these  matters,  as  would  an  individual.  The  answer  to  this  is  that 
the  men  who  are  officers  of  a  trust  company  or  bank  possess  the  same  sympathy  and  feel- 
ings as  do  other  people.  Friendliness  is  a  part  of  their  training.  Experience  shows  that 
they  have  been  as  tmifomly  kind  and  sympathetic  in  the  care  of  those  for  whom  trusts 
were  created   as  individuals  have  been. 


Business  Trusteeship 

It  frequently  happens  that  a  man  who,  by  his  own  efforts,  has  built  up  a  good  busi- 
ness during  his  lifetime,  wishes  to  have  the  business  continued  after  his  death,  for  the 
benefit  of  his  family,  or  until  a  son  grows  to  manhood.  He  has  the  right,  under  the  law, 
to  give  the  business  into  the  hands  of  a  trustee,  to  be  operated  under  such  conditions  as 
he  may  name.  In  trusteeships  of  this  kind,  the  trustee  is  not  expected  to  make  good,  out 
of  his  personal  estate,  the  losses  which  might  occur  in  carrying  on  the  business,  although 
he  is  relied  upon  to  use  diligence  and  good  judgment.  In  other  words,  the  trustee  takes  the 
place  of  the  man  himself,  in  order  that  the  business  may  be  kept  in  the  family.  Sometimes, 
also,  it  is  a  good  plan  for  a  man  to  protect  his  interest  in  a  partnership  in  the  same  way, 
in  order  to  keep  his  estate  from  being  sacrificed.  In  caring  for  a  business,  the  corporate 
trustee  is  preferable  for  the  reason  that  a  group  of  experienced  business  men  will  guard  the 
interests  of  the  owner,  will  carry  out  his  wishes  impartially,  and  will  bring  their  combined 
judgment  to  bear  upon  all  business  problems  as  they  arise.  Where  special  financing  is 
needed,  the  corporate  trustee  has  at  hand  the  means  for  providing  it. 

Broad  Experience  Essential 

Aside  from  the  question  of  better  service  in  general,  the  corporate  trustee  has  today 
become  practically  a  necessity.  Formerly,  it  was  a  comparatively  simple  matter  to  settle 
a  man's  estate.  It  was  not  even  necessary,  in  many  cases,  to  submit  an  accounting.  Heirs 
could  often  agree  among  themselves  as  to  how  the  property  should  be  handled,-  and  could 
thus  keep  the  facts  within  the  possession  of  the  family.  Now,  however,  the  state  and 
federal  governments  make  careful  inquiry  into  all  estate  matters.  Inheritance  taxes  must 
be  paid.  Income  taxes  must  be  accounted  for.  The  laws  governing  these  taxes  are  very 
complex.  Hence,  broad  experience  is  essential  in  the  handling  of  the  many  details  involved. 
Unless  proper  methods  are  used,  the  trustee  is  very  likely  to  meet  with  difficulty.  The  work 
must  be  handled  so  that,  when  reviewed  by  state  and  federal  authorities,  it  may  be  above 
censure  and  penalty. 

Nowadays,  a  man  of  business  ability  hesitates,  even  under  the  will  of  a  friend,  to  accept 
a  trusteeship.  His  responsibilities  are  great.  He  may  be  tempted  to  favoritism.  His 
freedom  is  restricted.  Often  when  he  wishes  to  be  away,  the  duties  of  the  trusteeship  require 
his  presence.    His  services  must  cease  sooner  or  later. 

Hence,  trust  business  is  growing  rapidly.  Each  year  a  greater  number  of  persons 
create  trusts  by  will.  Trust  companies  and  banks  authorized  to  perform  similar  duties  are 
being  called  more  and  more  into  this  service,  and  their  officers  are  being  trained  in  all  of 
the  many  principles  and  duties  involved.  Therefore  a  trust  company  or  bank  should  be 
chosen  as  executor,  administrator,  guardian,  or  trustee,  because  it  specializes  in  the  manage- 
ment of  propert}-^,  and  in  the  settlement  of  estates. 


NOTE:  This  Talk  is  to  be  delivered  on 
or  before  January  25,  1923,  after  which 
it   may  be  released  for  publication. 


Talk  No.  5 


QUESTIONS  TO  BE  LEFT  WITH  THE  TEACHER 


1.  How  can  an  owner  of  property  control  its  use  after  his  death? 

2.  Explain   the   term    executor,   administrator.      Tell    something    of 

their  duties. 

3.  What  are  the  duties  of  a  guardian.'' 

4.  Why  is  it  advisable  to  appoint  a  trust  company  or  qualified  bank, 

rather  than  a  person,  as  executor,    administrator,    guardian, 
or  trustee.'' 

5.  How  can  a  man  perpetuate  his  business  after  his  death.'' 

6.  What  can  you  say  about  the  need  for  experience  in  handling  all 

estate  and  trust  business.'' 


Outline  for  Talk  No.  6 

THE  BANK  AND  YOUR  INVESTMENTS 

I.  An  Investor 

A.  A  school  child  invests  time  and  effort  for  future  return  in  ability 

B.  The  taxpayer  invests  in  public  school   for   future  return   in   citizenship 

C.  The  farmer  invests  time,  effort  and  money  in  his  land  for  dividend  in  harvest 

D.  In  business  sense,  one  who  uses  money  in  acquiring  ownership  of  property,  part 
of  great  financial  machine  which  each  year  gathers  up  and  puts  to  worli  wealth 
of  our  country  for  benefit  of  all 

1.  Ownersliip  may   represent 

a.  Entire    possession— home,    and  so  forth 

b.  Partial   ownersliip — stock   in   corporation,  partnersliip,   and   so   forth 

C.  Conditional     ownership — mortgages,    bonds,    and   so   forth 
II.  All  Property  Owned  by  Individuals 

A.  Laws  provide   equal  protection   for  all  investors 

B.  All  property,  houses,  lands,  railroads,  factories,  public  buildings,  farm  stock, 
automobiles,  furniture,  large  corporations,  small  stores,  have  owners,  like  our- 
selves 

III,  Some  Evidences  of  Investment 

A.  A  bond,  a  U.  S.  Liberty  Loan  bond,  for  example;  or  a  mortgage,  as  evidence  of 
money  invested  as  loan 

B.  A  certificate  of  stock,  as  evidence  of  partial  ownership 

C.  A  deed,    as    title   to    land 

D.  A  bank   pass   book,   as    evidence   of  a  bank  deposit 

E.  A  life  insurance  policy 

F.  Actual   possession   of  merchandise 

IV.  How  To  Be  an  Investor 

A.  Start  with  savings  account;  build  for  future  by  saving  through  self-denial  and 
hard  work 

1.   Few  people  know  how  to  save,  and   fewer  know   how   to   invest 

B.  The  small  sums  soon  add  up.  An  investment  of  $1000  made  last  year  at  6% 
adds  $5  a  month  every  month  this   year  to  j^our  income 

V.   Safety 

A.  Never  buy  investments  unless  you  understand  them 

1.  Avoid   fake-stock  promoters  and  salesmen  with  get-rich-quick  schemes 

2.  Get  your  advice  from  those  of   experience  in  investing.      Responsible   invest- 
ment houses  are  glad  to  serve  you 

3.  Ask  your  banker  for   information   and   help 

B.  Keep  away  from  high  rates  of  interest 

1.  Consider   safety   of  principal   above  interest  or  dividend 

2.  Never  buy  high  rate   speculative  investments.    Stick  to  safe,  fair  rate  invest- 
ments 

C.  Before  you  invest,  investigate 

Copyright,   1922,   American  Bankers  Association 


# 


Talk  No.  6 
Public  School  Series 


THE  BANK  AND  YOUR  INVESTMENTS 

ISSUED  BY 

Committee  on  Public  Education 
American    Bankers    Association 


The  word  "Bank,"  wherever  used,  refers  alike  to  trust 
companies,  state  banks  and  national  banks — in  short,  to 
all  banking  institutions  having  a  commercial  department. 


OUR  Talk  on  Character  showed  us  that  our  success  in  life  depends  upon  the  invest- 
ments we  make  each  day  of  our  talents  and  time.  Our  future  return  will  be  gain  or 
loss,  according  to  these  investments.  That  is  a  law  of  life  which  controls  the  invest- 
ment of  our  money,  just  as  it  controls  the  investment  of  our  talents.  As  we  make  good  or 
bad  investments  with  our  money,  so  will  we  have  future  gain  or  loss. 

Every  one  an  Investor 

By  attending  school,  you  make  an  investment  of  your  time  and  effort.  If  your  invest- 
ment is  properly  made,  you  will  receive,  as  your  return,  a  much  richer  lifetime.  The  tax- 
payer, who  annually  puts  millions  of  dollars  into  the  public  school  system  of  America,  is 
making  an  investment  which,  he  hopes,  will  bring  great  returns  in  educated  citizenship.  The 
farmer,  who  ploughs  and  fertilizes  the  ground,  who  sows  the  seed  and  cultivates  the  grow- 
ing crops,  is  also  making  an  investment  from  which  he  hopes  to  reap  a  dividend  at  harvest 
time.  Hence,  we  see  that  in  practical  life  we  reap  a  future  return  from  whatever  good  or 
bad   investment   we   make   today,   of  ourselves,  of  our  talents,  of  our  work,  or  of  our  money. 

In  the  business  sense,  the  word  investment  relates  to  the  use  of  money  in  acquiring 
ownership  of  property.  The  laws  of  our  country  permit  us  to  enjoy  this  right.  Our  owner- 
ship may  represent  entire  possession  of  property,  as  in  the  case  of  buying  a  home;  it  may 
represent  partial  ownership,  as  in  purchasing  stock  in  a  corporation;  or  it  may  be  condi- 
tional ownership,  as  in  the  case  of  buying  a  mortgage  or  a  bond.  In  buying  mortgages  and 
bonds,  we  are  merely  loaning  our  money  for  a  certain  period  at  a  certain  rate  of  interest. 
In  a  previous  Talk,  we  said  that,  in  borrowing  money,  some  form  of  promise  to  pay  had  to  be 
entered  into,  and  that  great  corporations,  railways,  and  governments  often  borrowed  money 
by  issuing  bonds  to  be  sold  to  people  who  have  money  to  invest.  These  bonds  are  a  form 
of  promise  to  pay,  just  as  is  a  note.  They  promise  to  pay  interest  during  the  time  of  the 
loan  and  to  pay  the  principal  at  maturity. 

When  we  speak  of  having  made  an  investment  in  United  States  Liberty  Loan  bonds,  in 
mortgages,  or  in  railroad  or  corporation  stocks  and  bonds,  we  mean  that  we  have  used  our 
money  to  buy  them.  They  have  become  our  property,  they  cannot  be  lawfully  taken  from  us, 
and  we  will  receive  the  interest  or  dividends  which  they  earn  as  long  as  we  own  them,  or  until 
they  mature.  .  Thus  it  is  plain  that  all  property,  such  as  houses,  lands,  railroads,  factories, 
public  buildings,  farm  stock,  automobiles,  furniture,  and  so  forth,  have  owners  who  are  persons 
just  like  ourselves. 

Copyright,  1922,  American  Bankers  Association 


# 


All  Property  Owned  by  Individuals 


The  ownership  of  the  great  corporations  of  America  is  vested  in  individuals — perhaps  even 
your  next  door  neighbors  or  yourselves — who  have  invested  money  in  shares  of  stock  or  in  bonds 
of  these  corporations.  Many  people  regard  the  ownership  of  the  United  States  Steel  Corpora- 
tion, for  example,  as  differing  from  the  ownership  of  the  workshop  just  around  the  corner.  Yet 
the  people  who  have  invested  their  money  in  shares  of  stock  of  the  Steel  Corporation  are  en- 
titled to  the  same  rights,  under  the  law,  as  is  the  owner  of  the  little  workshop.  In  the  corpora- 
tion, the  owners  hold  certificates  of  stock  (Illustrate)  as  evidence  of  their  investment,  whereas 
the  owner  of  the  little  workshop  holds  a  deed  as  title  to  his  land,  and  the  actual  merchandise 
in  which  he  deals  as  evidence  of  his  investment.  Thus,  our  great  railroads  and  other  corporate 
resources  are  owned  by  individuals. 

The  laws  of  our  country  stand  for  the  equal  protection  of  all  investors.  Because  of  this 
protection,  it  is  possible  and  profitable  for  us  to  make  good  investments.  It  gives  us  an  incen- 
tive to  work  hard  and  to  invest  our  money,  in  order  to  develop  and  improve  the  conditions 
under  which  we  live.  Investments  represent  past  effort,  since  the  person  who  wishes  to  pur- 
chase them  must  first  work  and  accumulate  funds  with  which  to  do  so.  Every  American 
citizen  who  is  thrifty  can  store  up  dollars  for  investment.  He  will  then  be  a  better  citizen, 
because  he  will  be  interested  in  preserving  his  investment,  whether  it  be  stocks  and  bonds,  the 
house  in  which  he  lives,  or  other  things  which  administer  to  his  comfort  or  to  that  of  his 
family. 

The  person  who  carries  life  insurance,  fire  insurance,  or,  in  fact,  any  kind  of  insurance, 
has  a  conditional  investment  or  equity  in  the  large  amounts  of  bonds  carried  by  these  in- 
surance companies  in  order  to  meet  amounts  which  may  become  due  him,  as  a  policy  holder. 

Bonds  are  always  secured  by  mortgages  on  lands,  or  on  the  buildings  or  other  property 
of  the  corporation,  in  the  construction  of  which  the  money  has  been  used.  Eventually,  when 
a  bond  matures,  the  money  must  be  repaid  to  the  one  who  has  loaned  it,  that  is,  to  the  owner 
of  the  bond.  Thus,  all  investors  are  a  part  of  a  great  financial  machine  which,  year  in 
and  year  out,  constantly  gathers  up  and  puts  to  work  the  wealth  of  our  country,  for  the 
mutual  benefit,  prosperity,  and  well-being  of  all. 

Sometimes  the  investments  of  wealthy  people  are  referred  to  as  if  they  differed  from 
the  investments  of  those  who  have  less  to  invest.  No  matter  what  a  man's  income  is,  it  can 
be  spent,  or  hoarded  (which  seldom  occurs),  or  invested  again  for  the  common  good  only 
by  the  person  receiving  it.  The  person  receiving  a  large  income  can  eat  only  three  meals 
a  day;  he  can  wear  but  one  suit  of  clothes  and  live  in  but  one  house  at  a  time.  He  cannot 
appropriate  his  wealth  to  himself  unless  he  locks  it  up  in  a  strong  box,  where  it  serves 
neither  him  nor  any  one  else.  The  man  of  wealth  never  does  this,  because  he  knows  that 
after  paying  his  expenses,  taxes,  and  so  forth,  he  can  promote  the  general  welfare  by 
sending  the   surplus    of  his   income  back   into    the    channels    of   trade. 

Investing  Means  Self-Denial 

In  America,  it  is  possible  for  any  one  who  is  willing  to  pay  the  price  of  self-denial 
and  hard  work,  to  be  an  investor — to  make  investments  of  money.  Good  investments  made 
in  early  life,  in  acquiring  ability  while  at  school  and  in  saving  such  small  sums  as  it  may 
be  possible  to  save,  lay  the  foundation  for  providing  the  comforts  of  later  years,  when  it 
is  harder  to  earn  a  livelihood  and  when  poverty  often  becomes  the  condition  of  those  who 
have  not  practiced  thrift  in  youth.  It  is  only  because  so  many  people  do  not  carefully  guard 
their  expenses  that  eighty  out  of  every  one  hundred  die  penniless. 


Something  saved  out  of'  the  money  we  have  today,  for  use  next  month,  or  next  year, 
or  in  the  years  to  come,  will  make  our  tasks  at  that  time  so  much  easier.  One  thousand 
dollars  saved  and  invested  at  six  per  cent,  last  year,  increases  our  income  by  five  dollars 
each  month  for  every  month  of  this  year.  Should  we  save  and  invest  a  like  amount  this  year, 
our  income  will  be  increased  by  more  than  ten  dollars  each  month  for  every  month  next  year. 
Smaller  savings,  of  course,  accumulate  in  like  proportion.  Thus  it  is  that  men  prosper 
through  investment,  having  first  learned  to  save  their  money.  For  this  reason,  as  boys  and 
girls,  we  must  learn  the  value  of  thrift,  of  saving  now  for  future  rewards,  even  though,  at 
first,  the  amounts  are  very  small.  In  every  field  of  human  endeavor  the  principle  is  the  same. 
Our  progress  is  in  proportion  to  the  amount  we  have  wisely  INVESTED.  For  the  vast 
majority  of  people,  the  very  best  way  to  make  financial  progress,  is  by  means  of  the  SAV- 
INGS ACCOUNT,  in  which  small  amounts  saved  above  living  expenses  are  deposited.  If 
the  boys  and  girls  of  America  wish  to  become  prosperous,  they  must  become  investors.  They 
must  start  by  using  the  savings  account. 

Above  All,  Invest  Safely 

It  is  not  wise  to  take  for  granted  that  those  without  experience  know  how  to  make 
safe  investments  of  money.  There  is  only  the  slightest  chance  of  success,  unless  the  invest- 
ment is  guided  by  those  who  know.  For  this  reason,  it  is  essential  that  the  following 
important   suggestions   be  left   with  you. 

1.  Never  Buy  Investments  Unless  You  Understand  Them 

Many  companies  are  constantly  being  organized  to  promote  unsound  schemes  which  you 
hear  referred  to  as  "wild-cat."  There  are  always  solicitors  ready  to  relieve  people  of  their 
savings  by  the  PROMISE  of  big  returns  on  ill-conceived  investments.  Attractively-printed 
statements  are  set  before  you  showing,  on  paper,  how  impossible  it  is  for  these  companies  to 
lose  money.  It  is  usually  difficult  to  verify  these  statements.  The  lure  of  great  wealth, 
always  a  temptation,  is  placed  before  you.  In  this  way,  thousands  upon  thousands  of 
thrifty  people  are  deprived  of  hard-earned  savings  every  year.  Widows  and  orphans  wlio 
have  inherited  money  are  frequently  sought  and  made  the  targets  of  these  fake-stock  sales- 
men. Misery  and  suffering  are  the  usual  results.  Beware  of  these  scheme  promoters ;  have 
nothing  to  do  with  the  suggestions  they  bring  to  you. 

2.  Keep  Aw^ay  From  High  Rates  Of  Interest 

Many  people  with  small  means  lose  money  because  they  very  often  insist  on  getting 
a  high  rate  of  interest  on  their  investments.  To  lose  one's  money  is  a  very  serious  matter, 
and  we  should  consider  safety  of  principal  above  large  returns  in  interest  or  dividends. 
Therefore,  we  should  never  buy  high-rate,  speculative  investments,  in  which  there  is  great 
risk,  but  should  stick  to  investments  which  pay  a  fair  rate  and  which  are  known  to  be  safe. 

3.  Get  A  Successful  Man's  Advice 

Whenever  you  wish  to  know  whether  an  investment  is  worth  buying,  go  to  a  banker, 
or  a  successful  business  man,  who  has  had  experience  in  making  investments  and  in  whom 
you  have  confidence.  Find  out  his  opinion  and  then  ACT  in  accordance  with  it.  In  all 
probability  this  will  mean  the  difference  between  successful  investment  and  total  loss  of  your 
money.  The  banker  deals  with  investments  every  hour  of  the  day  and  desires  to  give  you 
all  the  help  and  information  he  can.  He  believes  that  you  should  have  a  clear  understanding  of 
an  investment,  before  it  is  purchased.      He  knows   the   need   for   avoiding   stock   promotion 


€ 


schemes  and  get-rich-quick  propositions,  because  he  has  observed  many  cases  where  these 
have  brought  poverty  and  suffering.  He  has  learned  the  need  for  great  caution  in  all  invest- 
ments, and  is  less  likely  to  make  a  mistake  than  those  without  experience.  Responsible 
investment  houses  are  always  glad  to  give  you  advice.  While  many  states  have  endeavored 
to  pass  laws  protecting  the  public  against  the  promoters  of  fake  investments,  thousands  of 
people  annually  fall  victims  to  their  visionary  schemes,  because  they  fail  to  seek  advice  of 
those  experienced  in  making  investments. 

Careful  Investing  Brings  Success 

Increasing  numbers  of  people  are  learning  that  care  in  the  use  of  money  brings  success. 
Nearly  every  one  knows  how  to  work,  but  too  large  a  proportion  of  our  workers  have  not 
yet  learned  how  to  save.  Of  those  who  know  how  to  save,  there  are  many  who  know  very 
little  about  how  to  invest.  If  due  care  is  used,  success  will  follow  honest  effort  as  surely 
as  day  follows  night. 

The  men  who  successfully  use  and  invest  their  money  are  not  necessarily  men  of  any 
special  profession  or  ability.  Thousands  of  wage  earners  are  owners  of  good  investments. 
They  are  men  of  strength  and  purpose  who  have  determined  not  to  expect  sudden  wealth, 
but,  by  strict  economy  and  careful  investing  to  provide  for  themselves  and  their  dependents. 
They  stick  to  SOUND  investments — investments  which  can  usually  be  relied  upon  for  an 
assured  income  and  which  give  a  sense  of  deep   satisfaction   to  the  investor. 

No  matter  what  the  present  circumstances  may  be,  every  young  person  should  decide 
to  become,  as  soon  as  possible,  an  owner  of  investments.  The  lessons  of  thrift  practiced 
early  in  life  are  very  important  and  have  much  to  do  with  the  future.  If  you  keep  the 
investment  idea  before  you  as  a  desired  goal,  there  is  very  little  danger  that  you  will  ever 
lack  the  necessities  of  life. 

NOTE:  This  Talk  is  to  be  delivered 
oa  or  before  February  25,  1923,  after 
which  it  may  be  released   for  publication. 


QUESTIONS  TO  BE  LEFT  WITH  THE  TEACHER 

1.  In  what  sense  is  every  one  an  investor.? 

2.  Who   owns   the   railroads   and   other    great    corporations    of    the 

country  ?     Explain. 

3.  What  becomes   of  the  income   of  all  investors  .'^ 

4.  How  can  you  become   an  investor  of  money.? 

5.  Give   the   rules   for   safe   investment. 

6.  Why  are  bankers  specially  qualified  to  give  advice  on  investments? 


Outline  for  Talk  No.  7A 

OUR  RELATIONS  AND  THE  BANK'S  RELATIONS 
WITH  THE  REST  OF  THE  WORLD 

1.  Foreign  Trade 

A.  International  exchange  of  goods 

1.  Examples 

a.  Tea  and  coflFee 

b.  Materials  used  in  making  telephone 

c.  Materials  used  in  making  shoes 

d.  Eskimo  pies  and  player-pianos 

(1)   The  increased  demand  for  cocoa,  after  invention  of  Eskimo  pies,  re-established  a 
market  for  the  cocoa  of  Ecuador,  so  that  it  was  able  to  import  player-pianos 

2.  American  life  dependent  upon  products  from  everj'  continent 

B.  Importers  and  exporters 

1.    Traders  who  make  it  their  business  to  buy  tiie  things  produced  in  other  countries,  and  to  seU 
other  countries  things  produced  in  our  country 

II.  Foreign  Exchange 

A.  The  use  of  the  services  of  foreign  departments  of  banks  in  settling  international  financial  trans- 
actions 

B.  Instruments  used,   bills  of  exchange  and  commercial  letters  of  credit 

1.  Definition  of  a  draft  or  bill  of  exchange 

a.    A  written  order  or  request  from  one  person  to  another,  desiring  the  latter  to  pay  to 
some  person  designated,  a  certain  sum  of  money  on  account  of  the  drawer 

2.  Each  creditor  paid  in  the  coin  of  his  country 

a.  Francs  and  centimes  in  France 

b.  Pounds    sterling,   killings    and    pence     in  England 

c.  Marks  and  pfennigs  in  Germany 

d.  Lire  and  centissimi  in  Italy,   and  so  forth 

3.  All  banks  can  make  necessary  arrangements    for    foreign   payments   through   their   relations 
with  large  banks,  which  have  branches  and  agencies  throughout  the  civilized  world 

4.  Daily  advice  received   as  to  rates  of  exchange 

a.    Market  value  of  our  money  in  terms  of  other  currencies 
6.    Many  people  having  relatives  in   foreign  countries  send  money  by  foreign  draft  which  can 
be  secured  at  any  bank 

III.  Depreciation   of  Some   Foreign   Currency 

A.  Russian  rubles 

1.    Normal  rate  of  exchange  fifty  cents  each;  August,  1922,  several  million  for  a  dollar 

B.  German  marks 

1.    Normal  rate  of  exchange  about  twenty-five  cents;  August,  1922,  400  to  600  for  a  dollar 

C.  Cause  of  depreciation 

1.    No  gold  basis 

IV.  Travelers'  Checks  and  Letters  of  Credit 

A.    Can  be  purchased  at  any  bank 

1.    Make   for  safety  in   carrying  money  while  traveling 

V.  Lesson  of  War 

A.  No  country  can  live  unto  itself 

B.  Interdependence  of  all  countries  of  globe 
1.    American  money  invested  abroad 

C.  Our  progress  and  prosperity  dependent  upon  our  intelligent  dealing  with  all  international  rela- 
tionships 

VI.  Historical  Comment 

A.  Ancient  money  changers 

1.    The  money  changer  in  the  temple  at  Jerusalem,  exchanging  coins  for  traders  from  Egypt, 
Assyria,  or  Babylon,  who  desired  to  purchase  goods  at  Jerusalem 

B.  Possible  origin  of  bill  of  exchange 

1.    The  Lombards 

a.  Originally  lived  in  Italy 

b.  Leaders  of  foreign  trade  in  middle  ages 

c.  Carried  actual  money  from  country  to  country 

d.  Because  of  dangers  of  travel,  a  credit  and  ddbit  system  essential 

e.  Bill  of  exchange  doubtless  developed  from  some  necessary  form  of  request  for  payment 

f.  Traces  of  Lombards 

(1)  Lombard  Street,  London 

(2)  Three  golden  balls  of  the  pawnbroker. 

C    Pound  sterling  the  recognized  standard  of  value  in  foreign  trade 

a.  Due  to  position  of  Great  Britain  as  the  world's  great  trading  nation 

b.  Since  the  war,  dollar  exchange    recognized 

Copyright,   1922.  American  Bankers  Association 


Talk  No.  7A 

(See  Alternate  Talk  No.  7B) 

Public  School  Series 


OUR  RELATIONS  AND  THE  BANK'S 

RELATIONS  WITH  THE  REST 

OF   THE   WORLD 

ISSUED  BY 

Committee  on  Public  Education 
American    Bankers    Association 


The  word  "Bank,"  wherever  used,  refers  alike  to  trust 
companies,  state  banks  and  national  banks — in  short,  to 
all   banking  institutions   having  a  commercial  department. 


THE  subject  of  my  Talk  today  is  Our  Relations  and  the  Bank's  Relations  With  the 
Rest  of  the  World.     I  purpose  to  use  only   a   few  simple   and   familiar  illustrations, 
so  that  we  can  all  readily  understand  what  is  meant  by  Foreign  Trade  and  Foreign 
Exchange. 

Foreign  Trade 

Foreign  Trade  is  the  international  exchange  of  goods,  in  our  case,  the  selling  of  Amer- 
ican products  to  the  people  of  other  countries,  and  the  buying  by  Americans  of  the  products 
of  other  lands.  In  this  country  we  use  a  great  many  more  things  that  come  from  other 
countries  than  most  of  us  realize.  Their  use  has  become  so  common  that  we  accept  them 
without  thinking  of  our  part  in  foreign  trade.  The  most  familiar  illustrations  of  this  are 
tea  and  coffee  and  some  of  the  sugar  with  which  we  sweeten  them.  Much  of  our  tea  comes 
from  the  Far  East — from  China  and  Japan.  Santos,  Brazil,  ships  more  than  ten  million 
bags  of  coifee  every  year,  eight  millions  of  which  come  to  the  United  States.  A  full  bag 
weighs  137  pounds,  which  gives  you  an  idea  of  how  much  coffee  we  drink. 

Let  us  take  two  other  simple  and  familiar  illustrations,  shoes  and  telephones.  We  all 
wear  shoes,  and  every  one  here  has  used  a  telephone.  No  doubt,  shoes  have  been  worn  ever 
since  human  beings  walked  on  two  feet.  The  telephone,  however,  was  invented  by  an 
American,  only  a  few  years  ago.  The  inventor  died  very  recently,  and  was  then  only  75 
years   old. 

Most  shoes  are  made  chiefly  of  leather,  but  there  are  other  materials  in  them  with  which 
you  are  not  so  familiar.  You  probably  take  it  for  granted  that  the  shoes  you  wear  are 
made  wholly  of  American  materials.  Because  they  are  made  in  this  country,  you  naturally 
believe  them  better  than  any  other  shoes  in  the  world,  which  is  quite  right.  You  will  be 
surprised  to  learn  of  the  variety  of  materials  that  go  into  your  shoes,  and  the  number  of 
countries  that  supply  these  materials.  We  know  that  a  great  many  cattle  and  horses  are 
raised  in  this  country,  the  hides  of  which  are  finally  tanned  and  made  into  leather,  and  that 
much  of  this  leather  is  used  in  the  manufacture  of  shoes.  But  not  all  the  leather  for  shoes 
manufactured  in  this  country  is  made  from  the  hides  of  cattle  and  horses  raised  here.  Our 
shoemaking  industry  has  grown  so^great  that  our  tanners  and  leather  makers  are  buying 
hides  and  skins  in  almost  every  country  of  the  world. 

Copyright,  1922,  American  Bankers  Association 


Every  good  shoe  has  a  sole  made  of  heavy  leather,  called  sole  leather.  The  best  sole 
leather  comes  from  the  hides  of  steers  raised  in  the  southwestern  part  of  the  United  States, 
particularly  in  Texas,  and  also  in  the  Argentine  Republic.  Less  than  half  of  the  sole  leather 
used  by  our  shoe  manufacturers  is  made  of  American  hides.  The  hides  which  are  bought  in 
Argentina  form  a  part  of  our  foreign  trade.  The  soles  of  your  shoes  may  have  been  made 
from  foreign-raised  hides.  You  will  thus  see  that  foreign  trade  touches  every  man,  woman, 
and  child  in  the  United  States. 

A  study  of  a  high-grade  patent  leather  shoe,  such  as  girls  wear  to  parties,  developed 
further  interesting  facts.  The  vamp  of  this  shoe  was  made  of  horsehide  from  Russia.  Some 
of  you  may  be  wearing  Cordovan  shoes.  The  vamp  of  these  shoes  is  also  usually  made  of 
horsehide,  which  may  come  from  almost  any  part  of  the  world, — little  coming  from  Russia 
now,  because  of  the  ruin  of  its  foreign  trade,  and  that  is  one  of  the  big  reasons  for  the 
terrible  suffering  of  the  Russian  people. 

While  the  Russian  horsehide  that  made  the  vamp  of  the  patent  leather  shoe  was  tanned 
in  the  United  States,  the  chemical  substance  called  bichromate  of  potash,  used  in  the  tanning, 
was  produced  chiefly  in  Germany.  The  soft  top  of  the  shoe  was  made  of  goatskin  which  was 
produced  in  India,  in  South  America,  or  possibly  in  China.  Since  few  goats  are  raised  in  the 
United  States,  we  import  many  of  the  millions  of  goatskins  used  by  our  shoe  makers.  Then, 
we  noticed  that  the  shoe  had  an  especially  fine,  soft  tongue.  This  was  made  from  the  skin  of 
the  kangaroo,  raised  in  Australia. 

Into  that  patent  leather  shoe  have  gone  materials  from  Asia,  Australia,  South  America, 
Europe,  and  the  United  States.  Africa  furnished  the  gums  that  went  into  the  combination 
used  in  the  brilliant  black  polish  of  the  patent  leather.  That  composition  contained  Amer- 
ican lampblack  and  turpentine,  amber  from  the  shores  of  the  Baltic  Sea,  sandarac  (resin) 
from  Africa,  divi-divi  (a  plant  containing  tannic  acid)  from  Borneo,  and  tragacanth  (a 
mucilaginous  substance)  from  Persia. 

A  man's  shoe  has  a  broad,  solid  heel,  usually  made  of  leather  from  the  tough  hides  of 
water  buffalo,  which  are  the  chief  beasts  of  burden  in  India,  the  Philippines,  and  other 
tropical  countries  of  the  Far  East.  The  lifts,  or  layers,  of  such  heels  are  fastened  together 
with  nails  made  from  steel,  in  which  manganese  from  Brazil  or  India  is  an  essential  part. 
Another  nail  used  in  shoemaking  is  made  out  of  the  soft,  tough  iron  produced  in  Sweden, 
mined    with    machinery   made    in    the   United    States. 

The  vamp  of  the  patent  leather  shoe  that  we  have  been  examining  was  sewed  to  the 
welt  with  linen  thread.  Before  the  war,  the  linen  was  made  from  flax  grown  in  Russia  and 
spun  in  Scotland.  The  welt  was  cemented  to  the  edge  of  the  sole  with  a  composition  in 
which  rubber  fxom  either  Brazil  or  the  Malay  Peninsula  formed  a  part. 

Most  shoes  have  an  inside  lining.  American  cotton  furnished  the  twill  for  the  lining 
of  the  patent  leather  shoe.  The  products  of  half  a  dozen  of  our  states  were  used  in  pre- 
paring it.  One  does  not  think  of  wheat  as  supplying  an  essential  part  of  shoes,  but  the 
paste  used  by  the  shoemaker  is  made  partly  from  wheat  flour.  The  stitching  silk  came 
from  China,  and  Chinese  silk  was  used  in  weaving  the  label  that  carried  the  maker's  name. 

There  was  nothing  unusual  in  the  makeup  of  that  shoe.  Yet,  it  had  in  it  materials 
from  every  continent  on  the  globe,  and  from  several  of  the  countries  of  some  of  the  con- 
tinents, as  well  as  something  from  many  of  our  states.  The  girl  who  wore  this  shoe  to 
her  party,  probably  knew  nothing  of  its   foreign  trade  romance. 

We  spoke  also  of  the  telephone  as  an  illustration  of  foreign  trade.  This  handy  little 
instrument  which  enables  you  to  talk  to  any  of  your  friends  whenever  you  wish,  also  con- 
tains materials   from  every   continent  on  the  globe. 

How  many  of  you  know  what  connection  there  is  between  an  Eskimo  Pie,  and  the  export 
trade  in  player  pianos?     There  is  a  clear  and  close  connection.     It  is  this.     Eskimo  Pie,  as 


you  know,  is  a  slab  of  ice  cream  covered  with  chocolate.  Chocolate  is  made  from  cocoa. 
Ecuador,  in  South  America,  is  the  chief  producer  of  cocoa  in  the  world.  Just  before 
Eskimo  Pie  appeared  in  the  United  States,  Ecuador  was  having  a  great  deal  of  trouble, 
because  the  market  for  cocoa  was  over-supplied.  The  price  of  cocoa  was  so  low  that  the 
cocoa-raisers  in  Ecuador  could  not  get  enough  money  for  their  product  to  enable  them  to 
buy  what  they  wanted.  The  Eskimo  Pie  supplied  a  new  use  for  cocoa,  and  as  it  immediately 
became  very  popular,  millions  of  Eskimo  Pies  were  eaten  in  this  country.  As  this  increased 
the  demand  for  cocoa,  Ecuador  was  able  to  increase  the  sale  of  her  chief  product,  and  to 
get  a  better  price  for  it.  Consequently,  her  producers  were  able  to  resume  buying  the 
things  they  needed,  or  wanted,  one  of  which  was  player  pianos.  The  invention  of  Eskimo 
Pie  in  the  United  States  actually  improved  the  export  of  American-made  player  pianos  to 
Ecuador.     It  improved  other  lines  of  export  trade  at  the  same  time. 

You  have  now  seen  how  important  is  our  foreign  trade.  Our  life  has  become  so  highly 
developed,  that  we  are  dependent  upon  the  products  of  every  continent,  for  many  of  our 
ordinary  conveniences,  for  the  food  we  eat,  and  for  the  clothing  we  wear.  But  there  is  another 
side  to  foreign  trade.  Since  we  need  and  want  certain  things  that  come  from  other  countries, 
there  are  traders  among  us  who  give  their  time  and  attention  to  getting  these  things  for 
us.  They  buy  and  import  goods,  so  that  every  year  they  have  a  large  bill  to  pay  for 
thousands  of  articles  that  come  from  all  corners  of  the  globe,  from  the  wilderness,  from 
the  desert,  from  icy  barren  wastes,  from  the  depths  of  the  sea,  and  from  centers  of  popula- 
tion and  civilization. 

Foreign  Exchange 

How  do  they  pay  these  bills?  In  a  very  simple  and  easy  way.  They  really  settle  their 
obligations  by  paying  with  the  things  produced  in  this  country,  which  the  people  of  other 
lands  need  and  want.  Just  as  we  buy  and  use  the  things  they  produce,  and  we  do  not;  they 
buy  and  use  things  that  we  produce.  Each  country  produces  those  things  for  which  it  has 
natural  products,  called  raw  materials,  such  as  the  tea  and  coffee  I  spoke  of  in  the  begin- 
ning; such  as  the  cotton  that  forms  so  large  a  part  of  the  production  of  our  southern 
states ;  such  as  the  rubber  of  Brazil  and  the  Far  East,  and  a  long  list  of  other  things. 
You  will  see  from  what  I  have  said  that  our  Imports  are  paid  for,  in  part,  by  our  exports. 

When  we  say  that  people  in  distant  lands  pay  with  things  produced  in  their  country,  we 
do  not  mean,  of  course,  that  the  man  in  Alabama  who  produces  the  cotton  which  is  sold  in 
Spain,  or  in  England,  or  in  Japan,  or  in  some  other  foreign  country,  actually  gets  his  pay 
in  the  product  of  one  of  these  countries.  He  does  not  have  to  take  Japanese  silk,  or  Spanish 
olive  oil,  or  English  cutlery,  for  his  cotton.  He  is  paid  in  money,  American  money,  and  is 
able  to  buy  with  American  money,  many  things  produced  in  other  countries.  Just  so,  the 
man,  let  us  say,  in  England,  who  buys  Alabama  cotton  pays  for  it  in  English  money,  and 
also  sells  his  cutlery,  which  is  exported  to  the  United  States,  for  English  money,  that  is, 
pounds  sterling,  shillings,  and  pence. 

Here  is  where  the  bank  dealing  in  foreign  exchange  serves  us.  All  these  financial  trans- 
actions are  conducted  with  the  help  of  the  foreign  departments  of  banks,  by  bills  of  exchange 
or  commercial  letters  of  credit.  Each  producer,  or  trader,  receives  payment  for  his  goods 
in  the  coin  of  his  country,  francs  and  centimes  in  France,  marks  and  pfennigs  in  Germany, 
lire  and  centissimi,  in  Italy,  and  so  forth.  Even  our  smaller  banks  which  have  no  foreign 
departments  can  help  make  all  necessary  arrangements  for  foreign  payments  of  money, 
through  their  relations  with  the  large  city  banks.  These  large  banks,  some  of  which  have 
branches  and  agencies  in  all  parts  of  the  civilizi'd  world,  receive  advice  every  day  as  to  the 
market  value  of  our  money  in  terms  of  the  money  of  any  other  country.  We  call  this 
valuation  the  rate  of  exchange.  For  example,  your  bank  can  know  any  day  the  exact 
number  of  French  francs,  or  Italian  lire,  or  any  other  currency  which  you   can  get  for  a 


dollar.  If  you  wish  to  send  $5,  let  us  say,  to  some  one  in  Paris,  all  you  have  to  do  is 
go  to  the  bank,  and  buy  a  draft.  A  foreign  draft  is  a  bank's  order  on  its  foreign  corre- 
spondent "to  pay."  The  banker  will  draw  the  draft  upon  a  correspondent  bank  in  Paris, 
perhaps  the  Credit  Lyonnaise.  He  will  look  up  the  number  of  francs  and  centimes  you 
can  receive  for  $5  that  day,  and  fill  out  the  draft  which  asks  the  Credit  Lyonnaise  to  pay 
that  number  of  francs  and  centimes  to  the  person  or  company  to  whom  you  wish  the  money 
sent.  Many  people,  who  have  relatives  in  foreign  countries,  send  them  money  in  this  way. 
This  is  the  way  practically  all  money  is  sent  abroad  or  is  received  from  abroad.  Imports  to 
this  country  are  paid  for  by  foreign  drafts  drawn  on  banks  in  the  countries  from  which  we 
buy  goods,  just  as  exports  are  paid  for  by  drafts  drawn  on  banks  in  this  country. 

Depreciation  of  Some  Foreign  Currency 

During  the  war  this  system  of  sending  money  abroad  was  broken  down  entirely  between 
certain  nations.  Enemy  nations  do  not  recognize  the  obligations  of  each  other.  Therefore, 
there  remained  no  basis  of  mutual  confidence.  Even  today  there  are  certain  nations  whose 
currency  values  vary  so  widely  from  week  to  week,  and  even  from  day  to  day,  that  it  is  im- 
possible to  deal  with  them.  The  paper  money  of  some  European  countries  no  longer  rests 
on  a  satisfactory  gold  basis,  and  is  worth  less  than  the  paper  upon  which  it  is  printed. 
Russian  rubles,  that  in  1914  were  worth  about  fifty  cents  each,  now  have  a  value  of  several 
million  to  the  dollar.  The  German  mark  and  the  Austrian  krone  are  also  very  unstable.  It 
is  possible  to  get  great  quantities  of  them  in  exchange  for  American  dollars,  because  the 
value  of  our  dollar  is  based  on  a  strong  reserve  of  gold.  . 

Traveler's  Checks  and  Letters  of  Credit 

The  present  system  of  foreign  exchange  enables  people  who  wish  to  travel  to  purchase 
and  take  with  them  into  any  other  country  foreign  drafts,  traveler's  checks,  or  traveler's 
letters  of  credit,  and  exchange  these  into  the  money  of  that  country.  All  banks  supply  them 
to  their  customers.  As  people  are  travelling  more  and  more,  our  banks  are  constantly  being 
brought  into  direct  contact  with  the  rest  of  the  world. 

The  Lesson  of  the  War 

The  late  war  brought  home  to  us  the  lesson  that  no  country  in  these  modern  times 
"liveth  unto  itself."  In  view  of  the  billions  of  dollars  of  American  wealth  now  invested  in 
the  bonds  of  European,  Asiatic,  and  South  American  countries,  and  the  large  amount  of 
trade  it  is  necessary  for  us  to  conduct  with  these  countries,  you  will  see  that  we  must  have 
an  intimate  concern  in  all  that  enters  into  commerce  between  nations.  Our  future  progress 
depends  largely  upon  the  manner  in  which  we  deal  with  these  relationships. 

Note:  This  Talk  is  to  be  delivered  on 
or  before  March  25,  1923,  after  which 
it   may   be   released   for   publication. 


QUESTIONS  TO  BE  LEFT  WITH  THE  TEACHER 

1.  What  do  we  call  the  process  of  exchanging  the  money  of  different 

countries  ? 

2.  What  references  are  made  in  the  Bible  to  this  process  .f* 

3.  Who  were  the  Lombards  .f* 

4.  Why  has  English  money  been*  largely  used  as  a  standard  of  value.'* 

5.  How  do  banks  send  money  abroad.'* 

6.  What  use  is  made  of  traveler's  checks  and  letters  of  credit.? 


Outline  for  Talk  No.  7B 

THE  RELATIONSHIP  BETWEEN 
FARMER  AND  BANKER 

I.  Banks  Encourage  Scientific  Methods  • 

A.  By  studying  the  farmer's  problems 

B.  By   demonstrating  and   distributing  of  facts  developed  by  colleges  of  agriculture 
and  departments   of  agriculture 

C.  By  helping  to  secure  good  roads  and  better  rural  education 

D.  By  cooperating  with  county  farm  agent 

1.  In  aiding  in  the  establishment  and  financing  of  county  farm  bureaus 

2.  In  helping  to  direct  farmers   and  their   families,   in   adopting  more   scientific 
methods 

3.  In  helping  to  finance  seed  shipments,  improved  farm  plans,  and  the  purchase 
of  pure  bred  stock 

4.  In  aiding  boys'  and  girls'  agricultural  clubs  to  secure  pure  bred  stock,  seed, 
and  so  forth 

6.  In  making  bank  center  of  enthusiasm  and  encouragement  for  continual  com- 
munity  improvement 

6.  In  promoting  exhibits   of   farm   products,   both    inside    and    outside    of   bank 
building 

E.  By  loaning  money,  and  helping  farmer  to  make   greater    success   through   better 
farm  management 

F.  By  learning  to  know   each   customer   personally,   dealing   with   him    frankly,    and 
understanding  his  problems  and  his   needs 

II.  Bankers'  Associations 

A.  American  Bankers  Association 

1.  Has    important    Agricultural    Commission    which     conducts     Banker-Farmer 
magazine  in  interest  of  banker-farmer  movement 

2.  Has  aided  in  securing  national   laws    for   improved    farm   loan    facihties    and 
marketing 

3.  Gives  prominent  place  on  program  to  discussion  of  agricultural  problems 

B.  State  Associations 

1.  Have  agricultural  committees 

2.  Cooperate  with  state  departments  of  agriculture  and  agricultural  colleges 
III.  Caution  in  Investing 

A.  Do  not  purchase  stocks  and  bonds  without  understanding  them  fully 

B.  Before  you  invest — investigate 

C.  Consult   your   banker,   who   will  give   information   and   help.      Get    to   know   your 
banker-neighbor.     Maybe  you'll  like  him. 

Copyrlsbt,  1822,  American  Bankers  Association 


Talk  No.  7B 

(See  Alternate  Talk  No.  7A) 
Public  School  Series 


THE  RELATIONSHIP  BETWEEN 
FARMER  AND  BANKER 

ISSUED  BY 

Committee  on  Public  Education 
American    Bankers   Association 


The  word  "Bank,"  wherever  used,  refers  alike  to  trust 
companies,  state  banks  and  national  banks-  in  short,  to 
all   banking  institutions  having  a  commercial  department. 


THIS  series  of  Talks  on  the  work  of  the  bank  would  not  be  complete  unless  it  included 
the  Relationship  of  Farmer  and  Banker.  Yet  no  one  would  claim  that  all  banks  and  all 
farmers  are  actively  linked  together.  City  banks,  though  lacking  personal  contact  with 
the  farmer,  are  giving  much  thought  and  attention  to  the  work  of  developing  our  farm  re- 
sources. Farmers  are  realizing  more  and  more  this  genuine  interest  in  their  welfare.  One  of 
the  most  important  commissions  of  the  American  Bankers  Association  is  the  Agricultural 
Commission.  Much  good  must  come  from  the  cooperation  of  bankers  who  take  a  real  interest 
in  rural  welfare  movements  and  of  farmers  who  likewise  are  interested  in  all  projects  for  the 
betterment  of  farm  life. 

Awaking  to  Our  Opportunities 

Only  within  the  last  few  decades  has  the  truth  been  brought  home  to  bankers,  to  farmers, 
and  to  people  in  general  that  the  nation's  greatest  single  business  opportunity  is  the  improve- 
ment of  our  farm  methods  and  resources.  Agricultural  schools  in  the  important  agricultural 
states  have  done  much  to  show  how  larger  returns  are  to  be  had  from  soil  cultivation — facts, 
which  once  demonstrated  and  understood,  are  bringing  greater  profit  to  the  farmer.  So  many 
fine  results  have  followed  the  use  of  new  methods  on  the  farm,  that  no  one  longer  doubts  their 
value.  We  all  realize  that  even  our  best  farming  sections  can  be  made  to  yield  greater  profits 
through  more  scientific  knowledge  and  handling.  Bankers  everywhere  are  striving  to  do  what 
they  can  to  help  farmers  in  their  localities.  They  are  trying  to  loan  them  the  money  they  re- 
quire, and,  what  is  even  more  important,  they  are  studying  the  farmers'  problems,  and  are 
taking  an  active  part  in  all  movements  for  the  benefit  of  the  farming  community. 

The  Bank  and  the  County  Farm  Agent 

Out  of  the  greater  interest  that  has  been  developed  in  rural  life  in  nearly  all  farming 
sections,  there  have  been  established  county  farm  bureaus.  Banks  have  been  glad  to  help, 
and  a  great  many  of  them  contribute  to  the  support  of  the  county  farm  agent.  Bankers  are 
working  hand  in  hand  with  him  for  the  good  of  the  entire  community,  and  are  helping  to  direct 
the  farmer  and  his  family,  from  the  more  or  less  narrow  habits  of  former  days,  into  the 
broader,  more  scientific,  and  more  satisfactory  methods  prevailing  at  the  present  time.  The 
banker  may  justly  claim  that  he  has  with  great  effectiveness  favored  and  supported  the  work 
of  the  county  agent. 

Copyright,  1922,  American  Bankers  Association 


The  good  resulting  from  the  cooperation  of  the  county  agent  and  the  banker  can  scarcel}- 
be  estimated.  If  the  farmers  of  a  certain  section  desire  pure-bred  stock,  cash  capital  is 
needed  to  buy  in  carload  lots.  If  the  project  has  the  sanction  of  the  county  agent,  the  banker 
usually  relies  on  his  recommendation,  and  stands  ready  to  handle  the  financial  end.  In  this 
manner  also,  the  banker  helps  to  provide  boys'  and  girls'  pig  clubs,  calf  clubs,  and  other  sim- 
ilar associations,  with  pure-bred  livestock.  Membership  in  the  boys'  and  girls'  clubs  in  1914 
was  23,000,  while  in  1922  the  total  membership  was  600,000.  The  increased  farm  production 
credited  to  these  clubs  is  almost  incredible.  For  instance,  the  average  yield  per  acre  in  the 
United  States  is  31  bushels  of  com  and  115  bushels  of  potatoes.  The  boys'  and  girls'  clubs 
forced  a  yield  in  1921  of  60  bushels  of  corn,  and  179  bushels  of  potatoes  per  acre.  These  fig- 
ures mean  almost  double  the  production  of  corn,  and  seventy-five  per  cent  greater  yield  of  po- 
\  tatoes.     This  increased  yield  made  by  the  clubs  comes  at  a  time  when  the  United  States  faces 

the  problem  of  an  average  lower  yield  per  acre  in  all  farm  products  than  that  of  farming 
countries  of  Europe  and  South  America. 

Another  purpose  of  these  clubs  is  to  improve  the  quality  of  farm  animals  until  "scrubs" 
shall  disappear  from  American  farms,  and  in  their  stead  shall  appear  farm  animals  in  which 
the  owner  can  find  satisfaction  and  profit. 

This  same  banking  support  is  back  of  much  of  the  work  of  the  county  agent.  Often  a 
farmer  feels  that  he  should  be  using  improved  methods  in  raising  his  crops  and  in  operating 
his  farm,  but  realizes  that  he  must  have  money  in  order  to  develop  his  plans.  The  bank  is  al- 
ways ready  to  consider  granting  him  a  loan,  especially  if  the  county  agent  approves  the  plans. 
In  hundreds  of  cases  this  contact  of  the  banker,  the  farmer,  and  the  county  agent  has  reacted 
to  the  advantage  of  each  of  them,  and  to  the  community  as  well.  The  willingness  of  the  bank 
to  help  in  financing  every  sound  business  enterprise  of  the  community  is  here  demonstrated  in 
the  aid  extended  the  farmer. 

Rural  banks  are  deeply  interested  in  exhibits  of  farm  products.  Displays  of  this  sort, 
generally  conducted  with  the  help  of  the  county  agent,  tend  to  arouse  keen  rivalry  among 
farmers  who,  of  course,  are  proud  to  receive  credit  and  recognition  for  good  results  obtained. 
Many  banks  throughout  the  country  hold  such  exhibits  in  their  own  banking  rooms.  Thus 
people  living  on  the  farm  become  familiar  with  the  bank's  interest  in  what  the  farmer  is  doing. 
It  has  been  said  that  with  the  bankers  and  other  business  men  continuing  their  support  of  the 
county  agent,  another  ten  years  will  witness  great  advancement  in  all  that  relates  to  rural 
life. 

What  Bankers'  Associations  Are  Doing 

In  nearly  all  meetings  of  bankers,  we  find  a  prominent  place  given  on  each  program  to 
the  discussion  of  questions  of  better  agricultural  methods  and  more  favorable  conditions  of 
rural  life.  For  years  the  American  Bankers  Association  thyough  its  Agricultural  Commission 
has  been  expending  time,  effort,  and  money  in  carrying  forward  tliis  great  movement.  Since 
1913  it  has  been  publishing  a  magazine  called  the  Banker-Farmer,  the  purpose  of  which  is  to 
suggest  ways  in  which  the  banker  can  aid  the  farmer.  Banks  receive  this  magazine  each 
month,  and  so  are  kept  in  touch  with  what  others  are  doing.  The  leaven  is  working.  Each 
year  a  greater  number  of  bankers  become  interested  in  studying  the  banker-farmer  relation- 
ship, and  new  banker-farmer  projects  are  developed.  Likewise,  state  bankers'  associations 
have  their  agricultural  committees  which  cooperate  very  effectively  with  state  departments  of 
agriculture,  and  with  agricultural  colleges  in  promoting  state-wide  agricultural  projects. 
Partly  by  reason  of  the  influence  of  the  American  Bankers  Association  we  have  national  laws 
affording  farmers  improved  facilities  for  making  farm  loans,  and  for  marketing  their  products. 
The  banker's  influence  has  also  helped  in  securing  improved  roads,  better  rural  education  and 
so  forth.  Underlying  all  this  activity  is  the  economic  truth  that  upon  the  welfare  of  the 
farmer  rests  national  prosperity. 


n 


Personal  Contact 

In  farming  sections  the  banker  and  the  farmer  are  in  close  personal  contact.  They  believe 
in  each  other  and  are  perfectly  frank  about  their  desire  to  work  together.  It  pays  the  farmer 
to  talk  over  his  business  affairs  with  his  banker,  and  it  pays  the  banker  to  be  in  the  confidence 
of  his  customer. 

One  difficulty  is  that  many  farmers  do  not  like  to  borrow  monej*  They  shrink  from  the 
idea  of  contracting  a  debt  of  any  kind.  There  are  times,  however,  when  greater  profits  are 
made  possible  through  the  use  of  borrowed  money.  Those  who  are  putting  business  manage- 
ment into  their  farming  go  directly  to  their  banker  for  his  help  in  determining  the  solution  of 
money  questions.  The  plan  of  "borrowing  for  profits"  prevails  in  all  commercial  lines,  and 
many  farmers  mark  the  beginning  of  their  larger  success  from  the  time  when  they  were  first 
willing  to  incur  a  debt.  It  pays  the  banker  to  help  make  the  farmer  more  prosperous,  and 
both  can  work  to  greater  advantage  under  relations  of  perfect  frankness  and  mutual  friendli- 
ness. The  usual  way  to  start  such  a  relationship  is  by  means  of  a  savings  or  checking  account. 
Every  banker  wants  to  know  his  depositors  personally  in  order  to  respond  to  their  business 
needs  more  efficiently.    Personal  contact  always  counts. 

Banking  Along  Broader  Lines 

There  is  a  time-honored  idea  that  the  typical  banker  is  a  man  dealing  in  dollars  who  has 
no  human  interests,  although  he  may,  now  and  then,  be  persuaded  to  grant  a  small  loan.  In 
the  olden  days  there  were,  it  is  true,  some  bankers  who  felt  that  the  only  satisfactory  way  to 
conduct  the  banking  business  was  to  have  all  borrowers  make  their  approach  with  fear  and 
trembling.  Perhaps  such  a  banker  could  be  discovered  somewhere  today,  if  a  long  enough 
search  were  made.  The  modern  bank  is  everywhere  operated  on  the  principle  that  it  helps 
itself  only  when  it  helps  others.  The  bank  customer  worthy  of  the  name  need  never  contend 
with  any  coldness,  or  holding  at  arm's  length,  on  the  part  of  the  banker.  The  bank  that  ren- 
ders the  same  financial  service  to  each  patron  gets  the  business 

In  hundreds  of  rural  sections,  banks  have  started  in  business  where  conditions  at  first 
held  out  very  little  promise  of  prosperity.  The  men  at  the  head  of  such  banks  have  been  leaders 
in  their  communities  in  bringing  the  farmer  to  see  the  great  advantage  of  good  farm  stock, 
good  farm  buildings,  crop  rotation,  and  comfortable  home  surroundings.  In  the  state  of 
Pennsylvania,  before  the  days  of  farm  bureaus,  one  entire  county  was  made  prosperous  by  a 
splendid  dairying  enterprise,  developed  under  the  direction  of  a  progressive  bank. 

The  message  that  needs  to  find  its  way  into  the  home  of  every  farmer  in  America  is  that 
the  banks  of  America  are  learning  how  to  cooperate  with  the  farmer.  There  still  remains 
much  to  be  accomplished,  but  through  cooperation  we  are  making  headway  towards  greater 
achievements  in  farming,  achievements  which  will  eventually  reveal  the  "Acres  of  Diamonds" 
which  surround  us  on  every  hand. 

Caution  in  the  Purchase  of  Investments 

I  would  not  feel  justified  in  closing  this  Talk  without  uttering  a  word  of  caution  regarding 
the  purchase  by  the  farmer  of  stocks  and  bond  s.  Do  not  purchase  stocks  or  bonds  with  which 
you  are  not  entirely  familiar,  or  without  consulting  your  banker.  In  other  words,  BEFORE 
YOU  INVEST, .  INVESTIGATE. 

Note:  In  order  to  make  this  Talk  as 
effective  as  possible,  reference  should  be 
made  to  specific  kinds  of  co-operative 
agricultural  work  being  done  in  each 
local  community. 

Note:       This    Talk   is    to  be    delivered 

on     or    before     March     25,  1923,    after 

which   it    may   be    released  for    publica- 
tion. 


Talk  No.  7B 
QUESTIONS  TO  BE  LEFT  WITH  THE  TEACHER 

1.  Tell  something  about  state  agricultural  colleges.      How  do  they 

help  the  farming  industry? 

2.  What  is  the  purpose  of  the  county  farm  agent? 

3.  How  does  the  bank  aid  the  county  farm  agent? 

4.  Explain  the  attitude  of  bankers'    associations    toward    improved 

agriculture. 

5.  Why  do  banks  want  to  help  the  farmer  in  every  way  they  can? 

6.  What  about  the  results  of  personal  contact  between  banker  and 

farmer  ? 


Outline  for  Talk  No.  8 
THE  FEDERAL  RESERVE  SYSTEM 

I.  Banking  a  System 

A.    Contrast  of  banking  system  with  various  business  organizations 

1.  Telephone  compajiies 

a.    Interdependent  organizatioas 

2.  Chain  stores 

a.    Individual  organizations,  governed  and  supplied  from  one  source 

II.  Banking  in  the  United  States  before  the  Establishment  of  the  Federal  Reserve  Systan 

A.  Banks  independent 
L    Advantages 

a.  This    form    fundamentally   suited  to  our  democratic  ideal 

b.  Each  bank  a  unit  dealing  in  credits  through  loans  and  discounts 
2    Disadvantages 

a.  No  centralized  organization 

b.  Legal   reserve   required  under  law  reduced  bank's  loaning  capacity 

(1)   Comparison    with  situation  in  small  town  with  water  supply  from  wells  or  cisterns 

c.  Currency  not  flexible 

d.  Stability  of  bank  endangered  in  time  of  money  stringency 

B.  Contrast  of  our  banking  system  with  those  of  other  countries 

1.  Canada 

a.    17  joint  stock  banks  with  8^00  branches 

2.  Great  Britain 

a.    38  joint  stock   banks   with   9,500  branches 

III.  Banking  in  the  United  States  under  the  Federal  Reserve  System 

A.  Origin  of  System 

1.  The  panic  of  1907  made  clear  the  need  of  a  new  banking  system 

2.  The  present  Federal  Reserve  system  established  by  Act  of  Congress  in  1914 

B.  Purpose   of  System 

1.    An  eflFort  to  combine  the  advantages  of 

a.  Centralized  business  organization 

b.  Branch  banking  system 

c.  Independent  banking  system 

C.  Organization  of  System 

1.  Banks  still  independent  units  with  local  oflScers  and  directors 

2.  Federal  Reserve  banks 

a.  Located  in  twelve  cities  so  as  to   supply   all   member   banks   in   district   with   adequate 
service 

b.  Governed  by  board  of  directors 

(1)   Six   elected  by  member  banks,  three  appointed  by  Federal  Reserve  Board 

c.  Supervised   by  Federal   Reserve   Board 

(1)   Appointed   by   the  President  of  the  United  States 

d.  All  stock  held  by   member   banks 

D.  Function  of  Federal  Reserve  banks 

1.  Cash  reserves  of  member  banks  held 

a.    Comparison  may  be  made  with  reservoir  holding  adequate  water  supply  for  a  town 

2.  Loans   made  to  member   banks   when  necessary 

a.    Loaning  capacity  of  member  banks  increased  by  ability  to  rediscount  at  Federal  Re- 
serve banks 
8.    A  flexible  currency  provided 

a.  New  currency  issued 

(1)  Put  out  by  demand 

(2)  Returned   automatically  when  demand  ceases 

b.  Old  currency  redeemed 

4.    Checks  for  member  banks  collected 

a.  A  saving  in  time 

(1)   Time  cut  in   half 

b.  A  saving  in  expense 

(1)   No  collection  charge 
6.    Federal  Reserve  banks  the  fiscal  agents  for  the  Government 

a.  Bond  issues  handled 

(1)   Liberty  bonds,  and  so  forth 

b.  Three   functions  of  sub-treasuries  taken  over 

(1)  The   supplying  of  currency  and  coin 

(2)  The  redemption  of  currency  and  coin 
(8)   The  cashing  of  Government  checks 

Coprrlght,  1922,  American  Bankers  Association 


Talk  No.  8 
Public  School   Series 


THE  FEDERAL  RESERVE  SYSTEM 

ISSUED  BY 

Committee  on  Public  Education 
American    Bankers    Association 


The  word  "Bank,"  wherever  used,  refers  ahke  to  trust 
companies,  state  banks  and  national  banks — in  short,  to 
all   banking  institutions   having   a   commercial   department. 


THE  Talks  already  given  have  treated  principally  of  the  relation  of  each  person  to 
the  local  bank  or  banks  in  his  community.  We  have  learned  that  the  bank 
receives  our  money  on  deposit  and  loans  out  part  of  it  to  those  in  need  of  funds 
to  conduct  their  business.  When  we  make  a  deposit  or  secure  a  loan  from  the  bank,  the 
transaction  is  evidenced  either  by  a  credit  on  the  books  of  the  local  bank,  or  by  the  execu- 
tion of  a  "credit  instrument,"  such  as  a  note,  a  mortgage,  or  a  trade  acceptance.  The 
business  of  the  bank  is,  therefore,  a  matter  of  credits.  We  have  seen  also  that  the  local 
bank  is  always  required  to  keep  a  reserve  on  hand  in  proportion  to  its  credits  or  deposits, 
so  as  to  be  ready  to  meet  the  demands  of  those  who  desire  to  draw  out  money. 

Bankings  a  System 

Today,  however,  our  subject  treats  of  the  relation  of  each  local  bank  to  our  present 
banking  system.  Just  as  a  local  telephone  station  is  valuable  to  you  and  to  me,  because 
it  belongs  to  a  telephone  system  whose  wires  reach  to  all  parts  of  the  nation,  so  the  local 
bank  is  valuable  because  of  its  connections  with  other  banks  in  the  United  States.  We 
cannot  thoroughly  understand  the  work  of  the  bank  by  merely  watching  its  local  opera- 
tion, any  more  than  we  can  understand  the  telephone  by  so  doing.  Like  the  telephone,  the 
local  bank  finds  its  strength  and  its  usefulness  only  because  it  is  part  of  a  system.  It  is 
true  that  we  had  a  banking  system  before  the  Federal  Reserve  System  came  into  being. 
Even  now  not  all  banks  or  trust  companies  are  members.  Every  one,  however,  realizes  that 
the  Federal  Reserve  System  is  today  the  chief  cornerstone  in  the  banking  business  of  America. 

Importance  of  Reserves 

A  vital  element  in  banking  is  the  question  of  the  bank's  reserve.  Money  on  deposit 
must  always  be  ready  for  depositors  when  they  desire  it.  In  like  manner,  the  bank  must 
be  ready  to  do  its  part  towards  loaning  money,  whenever  needed,  to  its  customers.  Other- 
wise, the  business  of  the  community  is  hampered.  In  other  words,  all  prosperity  depends 
largely  on  bank  RESERVES.  The  problem  of  handling  our  reserves  has  been  difficult  to 
solve.     Let  us  now  consider  briefly  the  results   attained  under  the  Federal  Reserve  System. 

Development  of  Banking  in  the  United  States 

First,  in  order  to  understand  the  difference  between  banking  and  other  business,  let 
us  go  down  town  to  shop,  or  to  visit  the  ice  cream  parlor  or  the  post  office.     You  notice 

Copyright,  1922,  American  Bankers  Association 


several  dignified  offices  with  bronze  signs  reading,  First  National  Bank,  Peoples  State  Bank, 
Citizens  Trust  Company,  or  something  of  the  kind.  Since  you  have  been  having  talks  on 
the  subject  of  banking,  you  know  that  these  are  banks,  and  you  know  something  of  what 
they  do.  You  also  know  that  each  of  these  banks  is  managed  by  its  own  officers  and  direc- 
tors, elected  by  its  own  stockholders,  and  that  these  men  are  practically  all  of  them  residents 
of  our  town,  and  have  grown  up  with  it.  They  are  interested  in  helping  the  town  to  grow, 
and  in  making  it  prosperous  because  it  is  their  home  town. 

The  banks  in  our  town  are  just  like  those  in  thousands  of  other  cities  in  the  United 
States.  I  wonder  if  you  realize  that  there  are  in  our  country  over  30,000  banks  (Dot  map) 
all  operated  independently  like  those  here  at  home.  Many  other  lines  of  business  have, 
during  the  past  twenty-five  years,  organized  on  nation-wide  lines,  as  for  example,  the  tele- 
phone companies,  of  which  we  have  spoken  earlier  in  the  Talk,  the  great  steel  companies, 
and  merchandising  organizations  with  branches  in  many  cities,  such  as  the  five  and  ten  cent 
stores,  chain  groceries,  chain  cigar  stores,  and  the  like.  You  know  when  you  see  one  of  these 
stores,  that  it  is  part  of  a  great  organization  owning  similar  stores  in  many  towns.  When 
you  take  a  trip,  however,  and  see  First  National  Bank  signs  in  different  towns,  you  must  not 
think  that  they  are  branches  of  the  same  bank.     They  are  separate  and  independent  banks. 

/ 

Comparison  with  Foreign  Banking  Systems 

Ours  is  the  only  important  country  in  the  world  which  has  such  a  system  of  independent 
banks.  Fundamentally,  a  system  of  this  sort  suits  our  ideal  of  democratic  organization. 
How  greatly  our  banking  system  differs  in  this  respect  from  the  systems  of  other  countries, 
you  will  understand  when  I  tell  you  that  Canada  has  only  17  banks,  but  these  17  banks 
have  3,500  branches,  and  that  Great  Britain  has  only  38  joint  stock  banks,  with  9,500 
branches.  These  branch  systems  are  strong  and  develop  bankers  of  great  skill.  Our  dis- 
tinctly American  system,  on  the  other  hand,  has  certain  advantages  which  have  led  our 
people  to  prefer  it  to  a  branch  banking  system  like  those  of  other  countries. 

Defects  in  Former  System 

For  many  years,  however,  it  has  been  recognized  that  we  lacked  certain  advantages 
which  are  obtainable  through  branch  banking.  A  plan  was  sought  whereby  these  could  be 
obtained  by  having  our  thousands  of  separate  and  independent  banks  get  together  and  co- 
operate for  the  improvement  of  our  banking  system,  and  for  mutual  protection  in  emer- 
gencies, for  themselves  and  for  the  customers  they  serve.  Business  men  and  bankers  recog- 
nized that  we  had  periodical  money  panics,  disturbing  to  business,  and  chargeable,  in  large 
part,  to  defects  in  our  banking  and  currency  system.  There  was  no  central  bank  from  which 
the  individual  banks  could  get  assistance  in  time  of  trouble,  no  flexible  means  of  adjusting 
the  amoimt  of  money  in  the  country  to  the  varying  needs  of  business.  Consequently,  panic 
conditions  caused  weak  banks  to  fail,^  and  even  strong  and  sound  institutions  to  be  endan- 
gered by  the  general  lack  of  confidence.  When  the  people  of  a  community  lose  confidence  in 
their  bank,  it  is  a  serious  matter  for  every  one.  In  1907,  an  especially  severe  panic  occurred, 
and  led  bankers,  business  men,  and  leaders  in  Congress  to  make  a  careful  study  of  banking 
practice  in  other  countries.  The  result  was  that  seven  years  later  Congress  passed  a  law 
providing  for  the  establishment  of  twelve  great  Federal  Reserve  Banks,  each  designed  to  serve 
as  a  sort  of  central  bank  for  such  banks  in  its  allotted  territory  as  might  become  members 
of  the  Federal  Reserve  System. 

Development  of  Federal  Reserve  System 

Now  let  us  examine  the  general  outlines  of  this  new  system.     It  began  to  operate  at 
an  opportune  time — the  fall  of  1914,  shortly  after  war  broke  out  in  Europe.      There  was 


retained,  as  before,  our  American  system  of  independent  banks  doing  business  under  the 
management  of  the  same  local  directors  and  officers.  About  10,000  banks  have  become  mem- 
bers of  the  Federal  Reserve  System,  and  thus  acquired  the  services  of  the  Federal  Reserve 
banks.  The  member  banks  own  the  entire  stock  of  the  Federal  Reserve  banks,  and  elect  two- 
thirds  or  six  out  of  the  nine  members  of  the  board  of  directors  by  which  each  Federal  Re- 
serve bank  is  operated.  The  other  three  directors  are  appointed  by  the  Federal  Reserve 
Board  at  Washington,  which  is  the  Governmental  body  having  supervision  over  the  Federal 
Reserve  banks,  though  it  does  not  operate  them.  The  members  of  the  Federal  Reserve  Board 
are  appointed  by  the  President  of  the  United  States. 

Functions  of  Federal  Reserve  Banks 

Now  you  will  want  to  know  what  the  Federal  Reserve  Banks  do.  That  we  will  take  up 
now  under  five  headings. 

1.  They  hold  member  banks'  reserves. 

They  hold  member  banks'  reserves  amounting  to  about  $1,800,000,000.  Before  we  had 
a  Federal  Reserve  System,  each  bank  carried  in  its  own  vault  the  amount  of  cash  required  by 
law  to  be  held  as  a  legal  reserve,  that  is,  ready  to  pay  depositors  on  demand.  The  really 
huge  gold  supply  of  the  country  was  thus  scattered  among  the  thousands  of  independent 
banks,  each  holding  a  relatively  small  amount  to  which  it  was  obliged  as  a  matter  of  self- 
preservation  to  cling  tightly.  This  method  of  banking  may  be  likened  to  the  old-time  method 
of  obtaining  a  water  supply  in  a  town  or  village.  Each  house  had  to  depend  on  its  individual 
well,  or  tank,  or  cistern.  Picture  to  yourself  such  a  town  afflicted  by  a  great  conflagration. 
Imagine  the  inadequacy  of  such  a  water  supply  under  such  a  catastrophe.  Also  picture  that 
same  town  grown  into  a  big  city.  When  the  water  became  low  in  one  well,  from  drought,  or 
excessive  use,  water  would  have  to  be  borrowed  from  the  neighboring  well.  It  is  probable  that 
the  water  in  that  well  also  was  at  a  low  level.  Thus  the  safety  of  all  was  threatened  because 
no  RESERVE  water  supply  was  at  hand.  Our  country  has  grown  rapidly  in  population  and 
even  more  rapidly  in  industrial  activity.  The  banking  facilities  which  were  sufficient  for  earlier 
days  and  simpler  organization,  have  needed  something  to  adjust  them  to  the  growing  busi- 
ness of  the  nation.  Under  the  Federal  Reserve  System,  we  have  a  series  of  modern  reservoirs, 
located  in  various  parts  of  the  country,  each  serving  the  needs  of  the  banks  in  its  own  district. 
In  each  of  these  reservoirs  credit  is  stored  up  to  be  supplied  to  the  various  banks,  as  the  need 
arises.  Each  reservoir  is  in  turn  connected  with  all  the  others  so  that  when  the  supply  in 
one  becomes  low,  the  others  may  be  temporarily  drawn  upon.  By  gathering  the  gold  reserves 
of  the  member  banks  into  the  twelve  Federal  Reserve  banks,  a  result  has  been  obtained  like 
that  yielded  by  the  construction  of  a  great  water  supply,  for  a  power  plant,  an  irrigation 
system,  or  a  city.  The  Federal  Reserve  banks  now  hold  over  three  billion  dollars  of  gold, 
the  greatest  reserve  fund  ever  accumulated,  and  are  strong  enough  to  meet  any  conceivable 
demands  for  gold,  for  foreign  exports,  for  domestic  withdrawals,  or  for  loan  expansion. 

2.  They  loan  to  member  banks. 

The  Federal  Reserve  banks  make  loans  to  the  member  banks.  Each  member  bank  for- 
merly had  to  depend  almost  entirely  upon  its  own  resources  in  making  loans  to  its  customers. 
When  it  had  loaned  all  of  its  own  money,  it  could  do  no  more,  even  though  the  merchant, 
manufacturer,  or  farmer  customer  had  great  need  of  more  credit,  and  was  seeking  it  for 
highly  important  and  necessary  purposes.  Hence  arose  what  was  called  a  "tight  money" 
situation.  Now  the  member  bank  can,  and  frequently  does  take  thp  notes  of  its  customers  to 
the  Federal  Reserve  bank,  and  borrows  there  in  much  the  same  way  as  the  customer  borrows 
from  the  member  bank.  The  Federal  Reserve  banks  have  loaned  to  their  member  banks  and  to 
the  Government  as  high  as  $3,400,000,000,  and  they  are  now  loaning  about  $1,000,000,000 


(August,  1922).  The  member  banks  borrow  at  the  Federal  Reserve  bank  when  diey  need 
money  to  assist  in  moving  crops,  or  for  similar  purposes,  and  in  emergencies,  and  pay  up 
when  the  demand  has  passed. 

3.  They  issue  currency. 

The  Federal  Reserve  banks  issue  currency.  A  large  part  of  the  bills  which  are  in  peo- 
ple's purses  are  Federal  Reserve  notes.  They  are  secured  by  pledge  to  the  Government  of  the 
borrowers'  notes  on  which  the  member  banks  have  borrowed  from  the  Reserve  banks.  The 
bank  notes  go  into  the  hands  of  the  public  when  activities  of  business  and  agriculture  create 
a  need  for  more  money  in  circulation,  and  go  back  automatically  when  the  need  has  passed. 
The  largest  amount  outstanding  was  about  $3,400,000,000  in  December,  1920,  and  the  amount 
out  at  the  present  time  (August,  1922)  is  about  $2,100,000,000.  From  these  figures  it  is  plain 
that  we  now  have  a  flexible  system  of  currency  issue.  The  privilege  of  note  issue  is  regarded  as 
of  great  value.  The  Government,  accordingly,  collects  from  the  Reserve  banks  all  of  their 
earnings  over  a  certain  amount,  as  a  franchise  tax,  that  is,  a  tax  designed  to  compensate  the 
Government  for  granting  the  note  issue  and  other  powers.  The  Reserve  banks  have  to  date 
(1922)  paid  to  the  Government  in  this  way  $124,500,000. 

4.  They  collect  checks. 

The  Federal  Reserve  banks  act  as  check  collection  agencies  for  their  member  banks.  We 
in  the  United  States  are  the  greatest  users  of  bank  checks  in  the  world.  To  assist  member 
banks  in  the  collection  of  checks,  the  Federal  Reserve  banks  have  established  a  country-wide 
system  of  check  collection,  and  collect  checks  on  over  28,000  banks.  This  collection  system 
has  reduced  by  at  least  one-half  the  average  time  required  for  collection  of  checks.  You  may 
gain  some  idea  of  the  importance  of  its  operations  when  you  know  that  the  Federal  Reserve 
banks  handle  each  month  about  fifty  million  checks  amounting  to  about  twelve  billion  dollars, 
with  tremendous  saving  in  time  and  expense. 

5.  They  act  as  agents  for  the  Government. 

During  the  war,  the  Government  appointed  the  Federal  Reserve  banks  its  fiscal  agents, 
and,  as  you  remember,  they  were  the  agencies  which  handled  the  sale  and  distribution  of 
twenty-one  billion  dollars  of  Liberty  bonds,  and  thirty-six  billion  dollars  of  short  term  cer- 
tificates of  indebtedness.  The  Reserve  banks  still  act  for  the  Government  in  matters  of  this 
kind,  and  have  also  taken  over  the  duties  of  the  former  subtreasuries  in  supplying  currency 
and  coin,  cashing  Government  checks,  and  similar  operations.  Their  usefulness  to  the  Gov- 
ernment along  these  lines  has  been  and  is  very  great ;  for  without  such  an  agency,  the  handling 
of  the  great  financial  transactions  during  and  since  the  war  would  have  been  extremely  difficult, 
if  not  impossible. 

NOTE:  This  Talk  is  to  be  delivered 
on  or  before  April  25,  1923,  after  which 
it   may   be  released    for   publication. 

QUESTIONS  TO  BE  LEFT  WITH  THE  TEACHER 

1.  What  is  the  main  purpose  of  the  Federal  Reserve  System.? 

2.  Who  owns  the  capital  stock  of  Federal  Reserve  banks? 

3.  Explain  how  Federal  Reserve  banks  act  as  a  "reservoir"  of  credit. 

4.  When  the  local  bank  needs  money  for  its  customers,  how  does  the 

Federal  Reserve  bank  supply  it.'* 

5.  What  is  the  effect  of  combining  the  bank  reserves  of  the  country 

under  the  Federal  Reserve  System.? 


Outline  for  Talk  No.  9 
ANALYSIS  OF  SIMPLE  BANK  STATEMENT 

I.  The  Bank  Statement 

A.  Bank  statement  based  on  examination 

1.  By  State  Bank  Examiner,  if  state  bank 

2.  By  National  Bank  Examiner,  if  national  bank 

3.  By  Federal  Reserve  Bank  Examiner,  if  member  of  Federal  Reserve  System 

4.  By  Clearing  House  Examiner,  if  a  member  of  a  clearing  house  association 
6.  By  bank's  auditor 

B.  Bank  statement  required  under  law  to  be  published 

1.  In  local  newspapers 

2.  At  stated  times 

3.  To  give  general  public  knowledge  of  progress  and  standing 

C.  Simple  bank  statement  analyzed 

1.  Resources  or  assets  (what  a  bank  OWNS) 

a.  Cash  on  hand  and  due  from  banks 

(1)  Cash  in  vault 

(2)  Cash  on  deposit  with  correspondent  banks 

(3)  Cash  on  deposit  with  Federal  Reserve  bank 

b.  Loans   and   discounts 

(1)   Interest    from   loans  the  chief  source  of  bank's  earnings 

c.  U.  S.  bonds  to  secure  circulation 

(1)  Bonds  owned  by  bank  but  deposited  with  Treasurer  of  the  United 
States  as  long  as  any   circulating  notes   are  outstanding 

(2)  Profit  from  issue  of  circulating  notes 

d.  Redemption   fund 

e.  Bonds  and  other  securities 

(1)   Interest  from  investments  an  important  source  of  bank's  earnings 

f.  Banking  house 

g.   Stock  in  Federal  Reserve  bank 

(1)   Amount  of  stock  owned  in  Federal  Reserve  bank  must  equal  6% 
of  capital  and  surplus  of  member  bank 

2.  Liabilities  (what  a  bank  OWES) 

a.  Capital  stock 

(1)  A  guaranty    fund   for  protection  of  depositors 

b.  Surplus  fund 

(1)  A  safeguard  to  capital  of  bank 

(a)   In  case  of  loss,  this  fund  used  first 

(2)  An  additional  protection  to  depositors 

c.  Undivided  profits 

d.  Demand  and  time  deposits 

e.  Rediscounts    and   money   borrowed 

(1)  First-class  commercial  paper  rediscsunted 

(2)  Money  borrowed  from  Federal  Reserve  bank 
f.  Reserves  for  taxes  and  interest 

( 1 )   Proportionate   amounts  to  cover  these  items  set  aside  monthly 

g.  Circulation 

(1)   Effects    only    national  banks 

II.  Historical  Comment 

A.  Private  banking:  before  public  control 

B.  State  or  national  charters 

C.  The  belief  that  the  public  has  the  right  to  the  protection  of  its  funds 

Copyright,  1922,  American  Bankers  Association 


Talk  No.   9 
Public  School  Series 


ANALYSIS   OF   A  SIMPLE   BANK 

STATEMENT 

ISSUED  BY 

Committee  on  Public  Education 
American    Bankers    Association 


The  word  "Bank,"  wherever  used,  refers  alike  to  trust 
companies,  state  banks  and  national  banks — in  short,  to 
all  banking  institutions  having  a  commercial   department. 


THE  banker,  as  we  already  have  learned,  requires  statements  of  his  customer's  business  in 
order  to  know  his  standing.  In  the  same  way,  the  law,  because  of  the  semi-public 
nature  of  the  banking  business,  requires  all  banks  and  trust  companies  to  publish 
"Statements  of  Condition,"  as  shown  by  their  books.  The  Comptroller  of  the  Currency  calls 
for  the  statements  of  national  banks,  and  the  State  Commissioner  of  Banking  for  those  of  state 
institutions.  Banks  are  required  to  publish  their  statements,  which  are  usually  called  for  five 
or  six  times  a  year,  in  the  newspapers  of  the  community  in  which  they  do  business.  In  this 
way,  the  general  public,  is  kept  informed  as  to  the  bank's  affairs.  A  statement  of  condition,  as 
in  the  case  of  the  customer's  statement,  shows  both  the  resources  and  liabilities  of  the  bank. 
The  resources,  as  you  know,  consist  of  the  cash  and  all  other  property  which  the  bank  OWNS, 
the  liabilities,  of  the  amounts  it  OWES  to  depositors  and  stockholders.  Total  resources  must 
ugree  with  total  liabilities. 

A  further  examination  of  the  bank  is  made  by  the  Banking  Department  through  its  ex- 
aminers. Bank  examiners  come  to  the  bank  unannounced.  They  may  come  at  any  time,  any 
day  of  the  year.  Banks  must  keep  their  records  in  such  a  way  that  the  bank  examiner  who 
has  full  authority  to  make  complete  examination  of  all  records  can  easily  verify  them.  His 
official  report  is  sent  to  the  State  Banking  Department,  if  it  is  a  state  bank,  or  to  the 
National  Banking  Department,  if  it  is  a  national  bank. 

Many  banks  also  have  their  records  audited  monthly  by  their  own  auditors.  Some  states 
require  examination  and  report  to  the  Banking  Department  of  the  bank's  affairs  by  a  com- 
mittee of  the  board  of  directors.  If  the  bank  is  a  city  bank  and  belongs  to  a  clearing  house 
jissociation,  it  will  be  examined  further  by  clearing  house  examiners.  If  a  member  of  the  Fed- 
eral Reserve  System,  the  bank  will  be  examined  annually  by  Federal  Reserve  bank  examiners 
j'Iso.  These  examinations  are  made  to  safeguard,  in  every  possible  way,  the  people's  money. 
Banks  are  required  to  conduct  their  business  on  the  highest  standards.  If  they  fail  to  do  so, 
they  will  be  criticized,  and  even  closed  by  law. 

Many  people,  who  have  only  a  scant  knowledge  of  accounting,  feel  that  they  can  not 
understand  a  bank  statement,  and,  therefore,  pay  no  attention  to  it.  This  is  a  mistake.  A 
little  explanation  will  help  anybody  to  grasp  the  meaning  of  bank  statements.  Every  person, 
who  has  money  on  deposit,  either  in  a  savings  or  a  checking  account,  should  know  the  condition 
of  the  bank  in  which  the  account  is  carried,  and  how  its  condition  compares  with  that  of  other 
banks. 

I  am  going  to  give  you  a  simple  statement  of  a  fair  sized  national  bank  (member  of  the 
Federal  Reserve  System).  The  figures  are  taken  from  the  books  at  the  close  of  a  day's  busi- 
ness. 

Copyright.  1922,  American  Bankers  Association 


/I 

RESOURCES 
(What  the  bank  OWNS) 

Cash  on  Hand  and  Due  from  Banks $212,462.69 

Loans  and  Discounts 982,339.29 

U.  S.  Bonds  To  Secure  Circulation 25,000.00 

Redemption  Fund 1,250.00 

Bonds  and  Other  Securities 460,575.08 

Banking  House 35,000.00 

Stock  in  Federal  Reserve  Bank 9,000.00     $1,725,627.06 

LIABILITIES 

(What  the  bank  OWES) 

Capital  Stock $200,000.00 

Surplus  Fund 100,000.00 

Undivided  Profits 48,015.91 

Demand  and  Time  Deposits 1,200,654.80 

Rediscounts  and  Money  Borrowed 150,000.00 

Reserves  for  Taxes  and  Interest: 1,956.35 

Circulation 25,000.00     $1,725,627.06 

Explanation  of  the  Bank's  Liabilities 

To  understand  a  bank  statement,  one  must  keep  in  mind  that,  for  every  dollar  paid 
to  or  deposited  with  the  bank  either  by  stockholders  or  customers,  a  record  is  made  under 
the  heading  of  liabilities.  Earnings  of  the  bank  are  owed  to  the  stockholders,  and  must 
also  be  carried  under  liabilities.  Though  a  deposit  of  money  or  other  item  is  recorded  as 
a  liability,  because  it  is  due  to  the  depositor,  the  cash  and  checks  making  up  that  deposit 
become  an  asset,  or  a  resource,  of  the  bank.  Thus,  when  you  deposit  $500,  the  liabilities 
of  the  bank  are  increased  by  that  amount,  and  the  money  itself  is  counted  among  the  bank's 
resources.  When  the  bank  invests  its  money,  the  property  bought  likewise  becomes  a 
resource.    Let  us  first  consider  the  bank's  liabilities. 

I.  Capital  Stock,  $200,000. 

If  you  recall  our  first  Talk,  you  will  remember  that  the  capital  stock  is  the  amount 
of  money  paid  into  the  bank  by  its  organizers  who  purchased  its  stock,  and  are,  therefore, 
the  owners  or  stockholders.  The  item  is  carried  as  a  liability,  because  the  bank  is  indebted 
to  the  stockholders  for  the  money  they  have  paid  in.  The  capital  stock  cannot  be  with- 
drawn by  the  stockholders  as  a  deposit  can,  but  stays  in  the  business  as  a  guaranty  fund 
for  the  depositors'  protection.  In  the  case  of  a  bank's  inability  to  pay  its  obligations, 
this  fund  is  used.  In  addition,  the  stockholders  of  the  bank  may  be  called  upon  for  a  like 
amount,  for  stockholders  in  national  banks,  and,  in  many  states,  stockholders  in  state 
banks,  are  held  by  law  under  a  double  liability. 

II.  Surplus  Fund,  $100,000. 

A  bank  sets  aside  a  certain  proportion  of  its  earnings  in  a  fund  called  the  surplus. 
Should  any  losses  occur,  they  are  taken  out  of  this  fund  first,  so  that  the  capital  of  the 
bank  will  not  be  reduced.  Then,  too,  the  surplus  is  an  additional  safeguard  and  protection 
for  those  who  deposit  their  money  in  the  bank.  National  banks  are  required  to  build  up  a 
surplus  to  at  least  twenty  per  cent  of  the  capital.  Many  banks  accumulate  a  much  larger 
fund.    The  surplus  belongs  to  the  stockholders,  but,  like  capital,  it  remains  with  the  bank. 

III.  Undivided  Profits,  $48,015.91 

Undivided  profits  also  represent  earnings  of  the  bank  which  have  not  been  distributed 
in  the  form  of  dividends  or  added  to  the  surplus  fund,  but  which,  like  the  capital  and  surplus, 
are  due  to  stockholders.  The  best  managed  banks  do  not  pay  out  all  of  their  earnings  in 
dividends.     Their  aim  is  to  keep  the  undivided  profits  account  growing,   so  that  substantial 


amounts,  when  earned,  may  be  transferred  to  the  surplus  fund.  The  latter  is  changed  only 
at  stated  intervals,  while  the  amount  of  undivided  profits  is  changing  daily  as  the  earnings  of 
the  bank  change. 

IV.  Demand  and  Time  Deposits,  $1,200,654.80. 

Demand  and  time  deposits  make  up  the  amount  which  the  bank  owes  to  the  persons, 
firms,  and  corporations  that  are  its  depositors.  The  bulk  of  deposits  of  a  commercial  bank 
are  demand  deposits,  which  may  be  checked  out  any  time,  but  often  a  considerable  amount 
represents  savings  deposits,  which,  when  left  with  the  bank  for  stated  periods,  draw  interest. 
Accurate  records  are  kept  of  all  deposits  and  of  all  withdrawals. 

V.  Rediscounts   and  Money   Borrowed,   $150,000. 

When  the  demands  of  borrowing  customers  exceed  the  amount  of  loanable  funds  a  bank 
has  on  hand,  the  bank  may,  if  a  member  of  the  Federal  Reserve  System,  borrow  money 
from  the  Federal  Reserve  bank  of  its  district, .  by  pledging  its  securities,  such  as  Liberty 
bonds,  or  by  rediscounting  first  class  commercial  paper,  already  discounted  for  its  cus- 
tomers. Such  borrowings,  of  course,  are  the  debts  of  the  bank,  and  are,  therefore,  shown 
as  liabilities. 

VI.  Reserve  for  Taxes  and  Interest,  $1,956.35. 

As  a  bank's  earnings  accumulate,  there  are  certain  rather  large  items,  such  as  taxes 
and  interest,  payable  by  the  bank  each  year,  which  it  would  be  a  mistake  to  carry  under 
the  heading  of  undivided  profits.  Many  banks  set  aside  monthly  the  proportionate  amounts 
required  to  pay  such  items.  In  this  way,  the  bank  shows  care  and  conservatism  with  regard 
to  its  published  figures.  As  taxes  and  interest  are  paid,  deductions  are  made  from  the 
amount  held  in  reserve  for  the  purpose. 

VII.  Circulation,  $25,000. 

State  banks  do  not  issue  bank  notes,  but  national  banks  have  always  had  the  privilege 
of  issuing  their  own  bank  notes  under  conditions  prescribed  by  law.  These  notes  circulate 
as  money,  and  are  known  as  national  bank  notes.  The  national  bank  first  buys  United 
States  bonds  of  a  face  value  equal  to  the  amount  of  the  Circulation  it  desires  to  issue,  but 
this  amount  may  not  exceed  its  capital.  The  bonds  are  placed  in  the  keeping  of  the 
Treasurer  of  the  United  States  in  order  to  insure  redemption,  that  is,  re-payment  of  the 
circulating  notes.  These  notes  are  the  bank's  promises  to  pay  the  sum  of  money  indicated 
on  each  note.     On  this  account,  the  amount  outstanding  must  be  shown  as  a  liability. 

Explanation  of  the  Bank's  Resources 

As  I  have  stated,  the  items  under  the  heading,  Resources,  include  the  various  kinds 
of  property  OWNED  by  the  bank,  and  all  debts  due  to  it. 

I.  Cash  on  Hand  and  Due  from  Banks,  $212,462.69. 

Cash  on  hand  and  due  from  banks  represents  the  actual  cash  held  in  the  vaults  of  the 
bank,  together  witli  the  money  which  the  bank  has  on  deposit  with  the  Federal  Reserve 
bank  and  with  conespondent  banks.  It  may  also  include  checks  deposited  for  collection 
which  are  drawn  on  other  banks.  This  amount  includes  the  required  legal  reserve  explained 
in  a  previous  Talk.  In  the  case  of  the  banks  which  are  members  of  the  Federal  Reserve 
System  the  legal  reserve  is  kept  in  the  Federal  Reserve  bank  of  its  district.  Money  is 
deposited  with  correspondent  banks  usually  for  the  purpose  of  paying  drafts  drawn  on  them. 

II.  Loans  and  Discounts,  $982,339.29. 

Loans  made  to  responsible  persons,  firms,  and  corporations,  against  promissory  notes, 
either  secured  or  unsecured,  are  entered  under  the  heading,  Loans  and  Discoiints.  All  loans 
and  discounts  are  passed  upon  by  officers  of  the  bank,  whose  chief  concern  in  making  a 
loan  is  to  see  that  it  is  well  secured,  either  by  the  personal  credit  of  the  borrower,  or  by 
adequate  collateral.     Interest  from  loans  is  the  principal  source  of  the  bank's  earnings. 


III.  U.  S.  Bonds  To  Secure  Circulation,  $25,000. 

As  has  been  explained,  these  bonds  are  held  by  national  banks  to  secure  circulating 
notes.  A  national  bank  is  no  longer  required  to  buy  and  hold  United  States  bonds  unless 
it  wishes  to  issue  circulating  notes.  As  there  is  a  small  profit  arising  from  it,  most  national 
banks  take  out  some  circulation.  The  bonds  are,  of  course,  owned  by  the  bank,  but,  under 
the  law,  must  be  deposited  with  the  Treasurer  of  the  United  States,  as  long  as  any  circu- 
lating notes  are  outstanding, 

IV.  Redemption  Fund,  $1,250. 

When  national  bank  notes  become  dirty  and  unfit  for  circulation,  they  are  sent  to  the 
United  States  Treasury  for  redemption,  and  the  amount  of  the  notes  is  charged  to  the 
redemption  fund.  The  bank  pays  the  Treasury,  and  receives  in  return  new  crisp  money 
for  the  amount  redeemed.  The  law  requires  each  national  bank  to  keep  in  the  United  States 
Treasury  a  redemption  fund  of  at  least  five  per  cent  of  its  outstanding  circulation. 

V.  Bonds  and  Other  Securities,  $460,575.08. 

Most  banks  invest  part  of  their  funds  in  high  grade  bonds  of  various  classes,  for  the 
reason  that  such  bonds  always  have  a  market  value,  and  can,  therefore,  be  sold  promptly  to 
meet  unexpected  demands  made  upon  the  bank  by  its  customers.  Interest  from  these  invest- 
ment securities  is  another  important  source  of  the  bank's  earnings. 

VI.  Banking  House,  $35,000. 

This  item  represents  the  cost  of  the  ground,  building,  furniture,  and  so  forth  used  by 
the  bank  in  conducting  its  business.  Generally  speaking,  banks  find  it  advisable  to  own  their 
bank  buildings  which  are  carried  on  the  books  at  cost,  or  at  a  low  valuation. 

VII.  Stock  in  Federal  Reserve  Bank,  $9,000. 

All  banks  that  join  the  Federal  Reserve  System  must  own  stock  in  the  Federal  Reserve 
bank  located  in  their  district  to  the  amount  of  six  per  cent  of  their  capital  and  surplus. 
Only  one-half,  or  three  per  cent,  of  member  banks'  subscriptions,  has  been  called  up  to  this 
time.  It  will  be  remembered  that  the  capital  stock  of  the  Federal  Reserve  banks  is  owned 
entirely  by  these  member  banks. 

The  Effect  of  Published  Statements 

Bankers  have  learned  to  conduct  their  business  upon  safe  and  conservative  lines.  Since 
the  adoption  of  the  Federal  Reserve  System,  the  American  banking  system  has  gained  greatly 
in  strength,  and  has  won  the  admiration  of  the  world.  The  periodical  publication  of  state- 
ments of  condition,  required  of  both  national  and  state  banking  institutions,  supplies  infor- 
mation which,  if  followed  methodically,  will  give  depositors  and  the  general  public  a  correct 
idea  of  the  progress  and  standing  of  their  own  bank  and  of  its  competitors.  Every  depositor 
should  learn  to  read  with  understanding  these  bank  statements  which  appear  in  the  daily 
newspapers  five  or  six  times  a  year.  A  depositor's  bank  is,  in  a  measure,  his  own  institu- 
tion. His  friendly  comment  regarding  increases  in  its  business,  or  improvements  in  its  ser- 
vice, will  encourage  officers  and  employes. 

NOTE:  This  Talk  is  to  be  delivered 
on  or  before  May  25,  1923,  after  which 
it   may   be  released   for   publication. 

QUESTIONS  TO  BE  LEFT  WITH  THE  TEACHER 

1.  What   are  the   Resources   of  a  bank? 

2.  What  make  up  its  Liabilities? 

3.  Who  asks  banks  to   compile   and  publish  statementg? 

4.  Why   does   the  law   require   examinations  of  banks? 

5.  What   are   the   Capital    Stock,    Surplus,    and    Undivided    Profits 

accounts  in  a  bank  statement? 


REFERENCES 


Elementary  Banking,  American  Institute  of  Banking;  New  York,  1922. 
Standard  Economics,  American  Institute  of  Banking;  New  York,  1922 
Standard  Banking,  American  Institute  of  Banking;  New  York,  1921. 

A  B  C  of  the  Federal  Reserve  System,  The,  Kemmerer,  Edwin  Walter;  Princeton  University 
Press,  Princeton,  1918. 

American  Banking  Practice,  Kniffin,  W.  H. ;  McGraw-Hill  Book  Company,  New  York,  1921. 

Banking  and  Business,  Willis,  H.  Parker,  and   Edwards,   George   W. ;   Harper  &   Brothers, 
New  York,  1922. 

Banking  and  Business  Ethics,  Borden-Hooper ;  Rand,  McNally  &  Company,  Chicago,  1921. 

Elementary  Principles  of  Economics,  Fisher,  Irving;  The  Macmillan  Company,  New  Yark, 
1919. 

Encyclopedia. 

Financial  History  of  the  United  States,  Dewey,  D.  R. ;  Longmans  Green,  &  Co.,  New  York, 
1918. 

Money  and  Banking,  Holdsworth,  J.  T. ;  D.  Appleton  &  Company,  New  York,  1919. 

Money  and  Banking,  Scott,  W.  A. ;  Henry  Holt  and  Company,  New  York,  1920. 

Money  and  Banking,  5th  Ed.,  White,  Horace;  Ginn  and  Company,  New  York,  1914. 

National  Monetary   Commission,  Laws   of   the   United   States   Concerning  Money,   Banking, 
and  Loans,  1778-1909;  Government  Printing   Office,   Washington,   1910. 

Outlines  of  Economics,  Ely,  R.  T. ;  The  Macmillan  Company,  New  York,  1920. 

Practical  Bank  Operation,  Langston,  L.  H.,  2  vols. ;  The  Ronald  Press  Company,  New  York, 
1921. 

Practical  Work  of  a  Bank,  The,  Kniffin,  W.  H. ;  The  Bankers  Publishing  Company,  New  York, 
1919. 

Principles  of  Economics,  Taussig,  F.  W.,  2  vols.;  The  Macmillan  Company,  New  York,  1921. 
Principles  of  Money,  The,  Laughlin,  J.  Laurence ;  Charles  Scribner's  Sons,  New  York,  1903. 
Value  of  Money,  The,  Anderson,  B.  M.,  Jr.;  The   Macmillan    Company,   New   York,   1917. 


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